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THE 
FLOW OF VALUE 



THE 
FLOW OF VALUE 



BY 

LOGAN GRANT McPHERSON 

Author of "How the World Make£^its Living," etc. 




NEW YORK 
THE CENTURY CO. 
1919; 



tl^,f^l 



Copyright, 1920, by 
The Century Co. 



Published, January, 1920 



JAll 30 1320 



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©aA56i656 



PREFACE 

The World War has given impetus to the con- 
viction, the growth of generations, that human en- 
ergy ought to be directed to the service of human 
kind. The conversion of the combatant nations 
into unified organizations for the conduct of war 
has tended toward an unprecedented coordination 
of the activities of their peoples. This gives force 
to the conclusion that there ought to be the coor- 
dination of their activities for the general good, 
not only in time of war but in time of peace. 

Although there is wide concurrence in the opin- 
ion that there will never be a reversion to the old 
conditions, there is lack of concurrence as to the 
changes that ought to be made in institutions and 
practices of the past. There are those who believe 
that there must be a radical transformation: 
others hold that modification of the status at- 
tained through the age-long development of 
civilization ought not to be abrupt. 

Of foremost importance will be the solution of 
the problems concerning the determination of 
wages, of prices, and the acquisition and tenure of 
property. There can not be adequate grasp of all 
that will need to be taken into account without com- 
prehension of the effect of procedure that has had 
the sanction of custom and of law. 

vii 



viii PREFACE 

In the following pages is an attempt to set 
forth in general and in broad outlines the sequence 
of cause and effect in the determination of prices. 
There is no endeavor to trace this sequence in its 
relation to any specified price at any specified 
time or place. This would compel an immediate 
study of the particular incidence of the particular 
forces involved. 

The meteorologist knows that the frost upon the 
window-pane is due to the temperature without 
and that within, to the thickness and texture of 
the glass, the character of its surface, the degree 
of moisture in the air. If he could in any given 
case measure each of these factors and the effect 
of each in their interrelation, he might be enabled 
to draw in simple outline the pattern that would 
be formed by their reaction and interaction, pro- 
vided the glass were clean. But a window-pane, 
even in a well-ordered household, is seldom, if 
ever, absolutely clean. Attached to it are nearly 
always extraneous particles, watery, oily, or 
dusty, which have a marked influence upon, or may 
even dominate, the hoary figuration. So also, 
while cognizance of the primary factors may make 
it possible to denote the course of prices, there 
can not, without other data, be ascertainment of 
just why there is a particular price for a particu- 
lar thing at a given time and place. ' 

The overwhelming importance of the problem 
makes it imperative to surmount the difficulties 



PREFACE 



IX 



that beset its solution. As the patient investiga- 
tion of phenomena of animate and inanimate na- 
ture in mass and in detail by astronomers, geolo- 
gists, physicists, chemists, and biologists has given 
rise to conclusions of vast benefit, so also must 
there be persevering study by economists of all 
that pertains to price. They may discover and 
isolate many a malignant sociological or psycho- 
logical bacillus and thus be led to find and apply 
an antitoxin. 

In the practice of medicine no more than a few 
decades ago it was chiefly through long experience 
that a physician acquired the insight which en- 
abled him to diagnose a disease, and the skill which 
enabled him to combat its progress. Now the stu- 
dent, grounded in anatomy, physiology, and or- 
ganic chemistry, gains in hospital and clinic that 
acquaintance with the various stages of every mal- 
ady which qualifies him, in practice in the outer 
world, to detect the nature of a disease, the degree 
of its advancement, and to apply the remedy — 
in the extreme, to resort to surgery. So also it 
may come about that economists, trained in the 
fundamentals of their science, cognizant of re- 
search into economic phenonaena, with perception 
developed by the study of the actual course of 
business, may, when they take part in the affairs 
of the world, be enabled promptly to recognize a 
pathological condition of industry or commerce, 
to decide upon the course requisite to overcome 



X PREFACE 

the plethora of overproduction and its ensuing un- 
employment, or the anemia of underproduction 
and the consequent deprivation, to dissolve the 
irritation that may culminate in cancerous growth, 
and thus to reduce to a minimum the resort to the 
excision of bankruptcy and foreclosure. 

Moreover, the time is inevitably approaching 
when the most complete information as to the ef- 
fect upon the general welfare of all of the ramifi- 
cations of any economic juncture will be indis- 
pensable as an aid to the judgment of any tribunal 
charged with the settlement of economic dissen- 
sion. In the past the procedure of such a tribunal 
has been very much like that of a court of law. 
Disputants have been heard, and decision often 
has been in favor of the side making the more skil- 
ful and forceful presentation. It may be, how- 
ever, that compliance with the petition of one who 
feels that he suffers unjustly may militate against 
the weal of many others not in evidence, or who 
indeed may not even be aware of the bearing of 
the dispute upon their activities or upon the re- 
ward for their activities. Legislators also have 
often made enactment in behalf of those who have 
raised the loudest clamor. Then when the enact- 
ment has worked to the disadvantage of others, 
they in turn have engaged in like vociferation, and 
it has been modified in their favor. In the long 
reach of time such pulling and tugging back and 
forth now and then may result in an equitable 



PREFACE 



XI 



equilibrium that could the better have been at- 
tained and adjusted to changing conditions were 
there continuing complete consideration, not only 
of contention but of the general welfare. 

It must be said that the analysis in these pages 
is, in a way, a continuation of the presentation em- 
bodied in a previous volume entitled ^^How The 
World Makes Its Living." It is the writer's de- 
sire, however, that each exposition be complete in 
itself. To this end there is here and there in this 
book a limited and condensed restatement of cer- 
tain of the premises and deductions of the earlier 
volume. Certain subjects there treated, as, for 
example, speculation, crises and panics, inherit- 
ance, and charity, are not here discussed. *^How 
The World Makes Its Living" presents the evo- 
lution of the entire economic structure ; ^^The Flow 
of Value," the sequence of cause and effect in 
determining prices, wages, and profit. 

It is further to be stated that this discussion is 
of the physiology of the economic structure, with 
little reference to its pathology. Definite knowl- 
edge of the physiology of the human body led to 
the perception that many manifestations long re- 
garded as pathological are indications of healthy 
development. So also it may be with the eco- 
nomic structure, as we attain a more thorough 
comprehension of the significance of its working. 



ACKNOWLEDGMENT 

It was the desire of the author that the manu- 
script of this book be scrutinized from the stand- 
point of the exposition in general, from the stand- 
points of the professional teacher of economics, 
of the practical philosopher of business, and of 
the practical philosopher of finance. This desire 
has been kindly and painstakingly fulfilled by 
Fabian Franklin, editor of the ^ ' Eeview " ; by Wal- 
ter W. McLaren, professor of Economics in Wil- 
liams College; by Leonor F. Loree, president of 
the Delaware and Hudson Company, whose ines- 
timable offices in manifold ways have forwarded 
the preparation of this volume; and by Paul M. 
Warburg, formerly vice-governor of the Federal 
Eeserve Board. Byron J. Eees, professor of 
English in Williams College, has obligingly read 
the proof. While each of these gentlemen has 
made suggestions toward the improvement of the 
discussion of which the author has gratefully 
availed himself, it is explicitly to be understood 
that no one of them is to be held responsible for, 
or is committed to concurrence in, any opinion ex- 
pressed in these pages. 

The author thanks the faculty of Williams Col- 
lege and the residents of Williamstown for many 
courtesies extended to him during his sojourn in 
that charming village where this book was written. 



CONTENTS 



CHAPTER 



PAGE 

Preface . . v 

I Human Effort and Human Wants . . 3 
II Property in Matter and Property in 

Force 18 

III Utility and Utilities 23 

IV The Exchange of Utilities and the Unit 

OF Exchange 34 

V A Hypothetical Development of Prices 
FOR Foodstuffs — the Emergence of 

Profit ^2 

VI A Hypothetical Development of Prices 
FOR THE Products of Artisans, for 
Substance and of Wages .... 64 
VII A Hypothetical Development of Prices 
FOR Sources of Substance and Instru- 
ments OF Production 84 

VIII A Continuation of the Hypothetical 

Development of Prices and Profit . 93 
IX The Effect of the Introduction and 
Use of Machines Upon Prices and 

Profit 114 

X The Actual Development of Industry 

AND Commerce in the United States . 136 
XI The Relativity of Human Effort and 

THE Relativity of Human Wants . . 143 

XII The Relativity of Prices 154 

XIII The Relativity of Profit 175 

XIV The Interrelations of Effort, Prices, 

AND Profit 188 

XV The Flow of Debits and Credits . . . 213 
XVI Value 232 



CONTENTS 

CHAPTER PAGE 

XVII Capital 252 

XVIII The Ultimate Units of Production and 

Consumption 266 

XIX A Summary, Restatement and Further 

Analysis 286 

Production, Buying, and Selling by 
Individuals 286 

Production by Organizations of Em- 
ployer and Employees .... 299 
Man-hours and Want-units . . . 303 
Eising and Falling Prices .... 311 

The Distinction Between Capital and 
Labor 314 

The Securing of Profit .... . 318 

Greater Reward for Greater Service 

Entails No Deprivation .... 324 
Value Depends Upon Return . . . 329 
Living Upon Rent, Interest, or Profit 334 
Man-hours for Man-hours .... 338 
The True Significance of the Ratio of 

Exchange 345 

The Synthesis of Production . . . 352 

Waiting for Payment 359 

The Retention of Credits .... 364 

Variation in Purchasing Power of the 
Dollar 368 

XX Money 377 

XXI Developed Functions of a Modern Bank 402 
XXII The Trend of the Monetary and Bank- 
ing System 424 

XXIII Sound Minds in Sound Bodies .... 437 
Index 463 



THE FLOW OF VALUE 



THE FLOW OF VALUE 



HUMAN EFFORT AND HUMAN WANTS 

It is an every-day saying that if we want to 
understand a thing we must look at it from a de- 
tached point of view. This means that in order 
to obtain full enlightenment in regard to a sub- 
ject it must be considered in all its relations 
and without bias. It is difficult for a person to 
take such a view of a matter in which he has 
an immediate self-interest; difficult for any one, 
reared in an environment that has engendered 
certain preconceptions, to take such a view of 
any problem affected by them. In the endeavor 
to lead to a completely detached judgment, earthly 
events are sometimes presented as they con- 
ceivably might appear to a being from another 
planet, typified by the Man from Mars. The 
presumption is that the Man from Mars is ut- 
terly unfamiliar with the course of things in this 
world but is the personification of that intelligence 
which enables him to perceive, prompts him to in- 
quire, and impels him to logical conclusion. Let 

3 



4 THE FLOW OF VALUE 

us attempt to outline certain phases of human ex- 
istence as they would have appeared to him had he 
arrived on this earth at any time during the years 
which preceded the outbreak of the war of 1914, 
and soared above, around, and among mankind. 

The Man from Mars would have perceived that 
all human beings consume food, that under the 
conditions of civilization they wear clothes and live 
in houses wherein are things they use and things 
that adorn. He would perceive that a large por- 
tion of the population spends hours of the day at 
work on the farm, in the forest, in mine, mill, fac- 
tory, office, and store, in propelling vehicle and 
vessel. His intelligence would lead to the prompt 
discernment of the fundamental fact that the pur- 
pose of all of this activity of those who work is to 
provide the food, the clothing, the shelter, and 
other things and services which minister to all 
who are living. 

He would perceive that human effort is put forth 
to meet human wants. He would perceive that 
human wants can not be met without the putting 
forth of human effort. 

The Man from Mars would perceive that for the 
satisfaction of his wants every person is dependent 
upon the efforts of others, that no one family can 
under the conditions of modern civilization pro- 
vide even the things essential to its existence en- 
tirely and exclusively through the exertions of its 
own members. 



HUMAN EFFORT AND HUMAN WANTS 5 

A more searching survey of this activity would 
reveal that a multitude of persons are engaged in a 
multitude of pursuits — in plowing, sowing, reap- 
ing, threshing, in converting grain into its prod- 
ucts, in preparing these products for the table ; in 
planting and gathering vegetables, nourishing 
trees, gathering fruits; in raising food animals, 
in transforming their flesh into forms of food, and 
horn, hide, and hoof into forms of use ; in felling 
trees and sawing logs, in fashioning the logs into 
boards, beams, and shingles, doors, and window- 
frames, in placing these forms in structures; in 
extracting minerals, in loading and preparing coal, 
in smelting ores, making them into mattes, bars, 
and billets, and working these into the final forms 
of use; in gathering and preparing cotton, wool, 
silk, and linen, in transforming fabrics into gar- 
ments ; in the transportation of persons and things 
by land and sea; in storing and marketing the 
things that others have prepared; in the exten- 
sion of knowledge and the diffusion of intelligence ; 
in the practice of the professions and the arts. 

The exertion of this activity means that there 
are always the application of human effort and 
that to which it is applied. Human effort is force 
emanating from the body and the brain. It is ap- 
plied to that which exists in man's environment. 
This is the universe — the cosmos — throughout 
which there is the perpetual reaction and inter- 
action of the cosmic forces. His more immediate 



6 THE FLOW OF VALUE 

environment is the earth, the air, the water, and all 
that in them is — the matter of which they are com- 
posed and the forces which play upon that matter. 
His effort may be applied directly in transforming 
matter into the things that meet his wants or in 
directing the application of cosmic force in that 
transformation. Thus man's activity in provid- 
ing the things that meet his wants consists in the 
application of force to matter. 

Further penetration of his intelligence would 
disclose to the Man from Mars that the matter 
to which man applies force is substance, such as 
the ores, woods and fibers, the grains and fruits, so 
wrought by cosmic force that it meets his wants 
or can be transformed to meet his wants. He 
would perceive that different substances are com- 
bined and fused to serve respective ends. Nearly 
every viand is of many ingredients. Few of the 
materials for clothing are composed entirely of 
one original substance. Silk from the cocoon, cot- 
ton from the boll, wool from the sheep, leather 
from the hide, are treated with a variety of sub- 
stances to give them durability, luster, color, and 
pattern: wool, silk, and cotton are combined in 
different fabrics in varying proportions. Even 
modest dwellings have foundations of brick, stone, 
or cement joined with mortar, a composite sub- 
stance. In the superstructures are divers woods, 
iron and steel in different forms; roof, cornices, 
and spouts may be of wood, slate, tin, or copper. 



HUMAN EFFORT AND HUMAN WANTS 7 

The paint and varnish are composed of ore, oil, 
and other ingredients. In many structures are 
brass made by fusing copper and zinc, bronze 
made of copper and tin. The glass of the win- 
dows has been made of two or three or more sub- 
stances. In the furniture, woods of different 
kinds are often combined. The books on the 
shelves may be of paper made from discarded gar- 
ments or of pulp from the forests, of printers' ink 
compounded of several substances, and the bind- 
ing is often of different substances in combination. 
This fusing and combining of substance is ef- 
fected by the fused and combined effort of many 
men. Nearly all existing forms of matter that 
were fashioned by human effort were wrought by 
the conjoint effort of many men, and their utiliza- 
tion in further production is by the conjoint effort 
of many men. In the operation of machines there 
is the conjoint application of human effort and cos- 
mic force. Their effect is exemplified in purging 
ores of dross, transforming them into billets and 
bars, and finally into wire, into nails, and other 
forms of use. Their effect is exemplified by the 
modern ocean liner, in the construction of which 
there has been the application of every kind of 
force to every staple substance. It embodies the 
results of the joint effort of thousands, perhaps of 
hundreds of thousands, of men. Thus there is the 
convergence of force from different sources. The 
examples that have been given of this convergence 



8 THE FLOW OF VALUE 

througlioiit the United States might be multiplied 
by examples of such convergence throughout the 
world. 

There is also the world-wide divergence of 
force in that each measure exerted in produc- 
tion may have effect in incalculable ramification. 
The stationary engine in a building devoted to 
miscellaneous manufacture may supply the power 
that drives many machines utilized respectively 
in making, for example, letter presses, cutlery, 
hand-bags, paper boxes. A locomotive engine 
may haul a train containing fertilizer, lumber, 
agricultural implements, dry goods, shoes, and 
carpets. The stationary engine and the locomo- 
tive engine contribute to the production of dif- 
ferent kinds of things that are used to divers 
ends by a multitude of persons. Wheat from 
the grain-growing regions may be transported 
to a mill in any of a hundred cities, and there 
transformed into flour. That flour may be trans- 
ported for consumption in the United States, or 
it may be conveyed across the Atlantic to the 
people of Europe, or across the Pacific to the peo- 
ple of Asia. To the making of every barrel of 
flour have contributed the efforts of farmers, farm- 
hands, of the makers of agricultural implements, 
of those engaged in transportation, of the men in 
mills, and of the men who made the machinery 
used in the mills. The flour in even a single barrel 
may find its way to the tables of many households. 



HUMAN EFFORT AND HUMAN WANTS 9 

The results of the efforts of the lumbermen who 
may have felled trees in Texas and of those who 
have sawn them into logs are diffused in reaction 
and interaction with the results of the efforts of 
others in fashioning the door-frames and sills 
that may be placed in a residence of an eastern 
city, the barrels in which sugar is shipped from 
New Orleans to Chicago, the tubs in which is 
packed the butter conveyed from Wisconsin to 
New York, the boxes containing garments worn 
by the young ladies of a New England college. 

If a seamstress do no more all day long and 
day after day than to sew buttons on trousers, 
coats, and waistcoats, she is giving the garments 
the potentiality of being fastened around the body, 
without which they would not be of service. But 
her effort is not effective without the conjoint ef- 
fort of her fellow-seamstress who makes the but- 
ton-holes. Sheep have been nourished on the 
plains and shorn; cotton has been planted and 
picked on the plantation; wool and cotton have 
been transported to factories, carded, spun, and 
woven into cloth, which has been transported to 
the wholesale establishments; thence conveyed to 
the clothing factory where designers have made 
the patterns and cutters have cut the fabrics into 
the pieces which have been placed in the hands of 
the contract tailor who employs tailors to sew 
them together, seamstresses to sew on buttons and 
to make button-holes. The completed garments 



10 THE FLOW OF VALUE 

are returned by the contract tailor to the clothing 
factory, whence they are transported to the retail 
store, whence they pass into the possession of the 
wearer. These garments may clothe clerks in the 
shops of San Francisco, farmers in the Mississippi 
Valley, operatives in the mills of the Carolinas. 
Each and every wearer benefits by the application 
of effort by every one, from the ranchman who 
attended the sheep and the negro who picked the 
cotton to the seamstress who sewed on the buttons. 

It may seem that the effort of the domestic, 
servant who cooks and sweeps does no more than 
minister to the comfort of the household. Yet 
that ministration contributes to promote the vi- 
tality of her employer and therefore in a measure 
to his putting forth effort toward results that may 
diffuse throughout the world. Through intricate 
and ramifying processes are brought to that 
servant her food, her clothing, and her shelter. 

From an electric power-house emanate the 
waves of the mysterious force that illumines the 
night and gives motion to the cars that carry 
passengers to and fro, thus contributing to the 
putting forth of effort by persons of all sorts and 
conditions. Through the application of force, 
substance is transformed into forms to which 
force is applied in further transformation, and so 
on in infinite series. From every man the results 
of his efforts extend as ripples extend from a cen- 
ter in a lake : they are interlaced with the results 



HUMAN EFFORT AND HUMAN WANTS 11 

of the efforts of others as the ripples from many 
centers in a lake are intermingled. 

As his sojourn upon this earth continued, the 
Man from Mars would perceive that instant by in- 
stant human beings are being born into this world, 
instant by instant human beings pass out of this 
world; that the current of human existence is in 
ceaseless flow. He would perceive that the wants 
of the living are met in greatest measure by the 
activity of the living, that in part they are met by 
the results of the efforts of those who have passed 
away, and that the activity of the living will fur- 
ther the existence of those who are to come. 

He would reflect that, as it is necessary for men 
to put forth effort in order to obtain the things 
and services necessary to their existence, it fol- 
lows that they are impelled continually to put 
forth effort in order that their existence may con- 
tinue. If production suddenly were to cease there 
would be no food and it would not be very long 
before all clothing were worn out : there would be 
no use for structures of any kind or machines and 
appliances. Thus it is that food is now in prepa- 
ration for future consumption ; cotton, wool, linen, 
and leather are now being transformed into cloth- 
ing to be worn in the future; coal is now being 
taken f rorn the mines for subsequent combustion ; 
woods are being cut from the forests, and ores 
taken from their beds for transformation; by 



12 THE FLOW OF VALUE 

means of structures, machines, and appliances, 
substances are now being transformed into things 
that will be used hereafter, and into materials 
which will enter into the future construction of 
structures, machines, and appliances. 

This means that there must be continual re- 
placement of that which is used and consumed. 
As bone and tissue of the body wear away they 
must be repaired; as crops are harvested new 
crops must be sown; as timber is cut new trees 
must be grown or additional forests brought into 
use ; as ores are extracted additional beds of min- 
erals must be acquired; as substance passes 
through stages of transformation new substance 
must be provided; structures, machines, and ap- 
pliances must be repaired, renewed, and finally 
replaced. 

Replacement need not always be exact in kind 
but must furnish that which will serve the purpose. 
As food is consumed additional stocks of food- 
stuffs must be provided, but the elements that are 
transformable into organic tissue are found in 
differing proportions in different substances. 
Wholesome and adequate diet may be provided by 
a great variety of selections from different kinds 
of grain, different species of fish, flesh, and fowl, 
different kinds of vegetables and fruits. Sub- 
stance for clothing must be soft, pliable, durable, 
of different degrees of warmth. There are divers 
kinds and grades of wool, of cotton, of silk, of 



HUMAN EFFORT AND HUMAN WANTS 13 

linen, of fur, and of leather that meet these re- 
quirements ; paper is coming into use for garments 
as are the fibers of plants not hitherto so used. 
Substance for buildings must be hard, durable, 
resistant to weather, susceptible of being wrought 
into shape and placed as required. Various kinds 
of wood, of stone, of clay, of ores are thus adapt- 
able. Substance for engines, machines, tools, and 
appliances must be suited to the divers purposes 
— ^to bore, cut, drill, turn, and lift. Numerous 
woods, metals, and stones can be fashioned to 
serve these ends. 

Not only is one substance substituted for an- 
other but substance of one kind is continually be- 
ing substituted for substance of another kind, new 
uses are ever being found for substances known 
to man throughout the ages, and substances such, 
for example, as platinum, aluminum, and rubber 
are brought into a more extended and varied use. 

As we reflect upon all that furthers the life of 
mankind, we comprehend the meaning of the work 
of man. Impressive are the manifestations of ex- 
istence in which he has no part. There is sublim- 
ity in regions of arctic ice, grandeur in mountain 
forest; and fascinating is the teeming plant and 
animal life of tropical jungle. We perceive the 
effect of man's reaction upon his environment in 
the vast areas where soil is tilled, flocks are herded, 
forests are cut, and minerals taken from the 



14 THE FLOW OF VALUE 

earth. His work is more in evidence in town and 
city. After the sunlight wanes, street and dwell- 
ing and place of assembly are made almost as 
available for his pursuits as before by the light his 
effort provides. In response to the play of cosmic 
force, the air ebbs and swirls, water rises to the 
clouds and falls to the earth again, but he regulates 
the course of the air and conveys water for his use 
through dwelling and work-place, through church, 
theater, and hospital, which likewise by means of 
his effort are suffused with warmth when the win- 
ter rages. In the light of this reflection, no longer 
are the great buildings and the avenues of the city 
of the same character in the landscape as are hill, 
plain, and river. Wood, brick, stone, and steel 
were once in the forest and in the earth. Through 
the application of human effort these substances 
were made into buildings. The texture, form, 
and color of all the wares displayed in all the 
shops have been due to human effort. Within the 
home, desk, table, and chair, the shelves and their 
books, the coverings of floor and wall, and the pic- 
tures that hang upon the wall have been given form 
and place by the effort of man. Without are the 
streets that have been paved and the park that has 
been cultivated by him. There comes an awing 
and reverent sense of the thought of the brain and 
the work of the hand of the innumerable throng 
who have ministered unto us. 



HUMAN EFFORT AND HUMAN WANTS 15 

If after perceiving things as they are, or 
rather as they were prior to the outbreak of the 
war, the Man from Mars should try to learn how 
they' came to be as they then were, there would 
arise the thought that that which was of the day 
was in sequence to that which was of the yester- 
day. And thus from yesterday to yesterday 
throughout the centuries, throughout the ages, has 
flowed the sequence of cause and effect through 
which human beings, their activities, their affairs, 
their creeds, their institutions, their wants, and 
their efforts in supplying these wants came to be 
as they were before the war began. 

As the animal with four legs came to stand on 
two, the fore-limbs were free for other use. Thus 
as man evolved, there developed the hand of man. 
This he used in pushing, pulling, lifting, and 
carrying. But little mental effort is required in 
directing the muscles of the body in such exer- 
tion, and therefore those of the lowest intelligence 
to-day can do little more with their hands than 
this. In higher application, the hand of man takes 
things apart and puts them together in forms in- 
tricate and manifold. To this developing dexter- 
ity is necessary an increasing delicacy of percep- 
tion and a more determinate guidance by the 
brain. 

In the course of time the human being made the 
lower animals push and pull and carry for him. 



16 THE FLOW OF VALUE 

He learned to bring the force of gravity to Ms 
aid, and to make the currents of the winds and 
waters work his will. To this achievement was 
requisite the intelligence, developed after he had 
been on this earth millions of years, to make 
steam serve as power, the all-pervading electricity 
serve his purposes, chemical force to dissolve 
forms of matter into their elements and to com- 
bine these elements into other forms of use to him. 

Until about the beginning of the nineteenth cen- 
tury there were few tools other than those which 
directly enhanced the power of the hand. In the 
last one hundred years man has come to provide 
structures, machines, and appliances used in the 
transformation of substance. Cosmic force may 
be applied through tools and machines to push, 
pull, lift, and carry, in taking things apart and 
putting them together, in the fashioning of things 
ponderous and massive, delicate and intricate, not 
only in fashioning concrete things but in the pro- 
vision of intangible service — power, heat, and 
light. Human progress is marked by the triumph 
of mind over matter, and by the triumph of mind 
over force. 

As men work together, their efforts must be 
directed and coordinated. To the direction of the 
efforts of others and to the application of cosmic 
force is requisite the brain capable of conceiving 
the thing it is desired to produce, and the mental 
force competent to direct that application of force 



HUMAN EFFORT AND HUMAN WANTS 17 

to matter wliicli results in its production. In an 
ascending scale there is the triumph of the minds 
of men over the force emanating from the lower 
animals, of minds of a higher order over the force 
emanating from men with minds of a lower order, 
and over the cosmic forces that play throughout 
the universe. 

With the growth of civilization has come the 
thirst for knowledge: the developing appreciation 
of form, color, and harmony has brought the de- 
sire for works of art and the impulse that prompts 
their production. There must be the exertion of 
human effort in meeting the wants of the mind and 
of the soul as well as those of the body. 



II 

PEOPERTY IN MATTER AND PROPERTY IN FORCE 

As the wants of each person are met by the re- 
sults of the efforts of others, there must be the 
exchange of the results of effort between different 
persons. As there is this exchange between per- 
sons living in one place and those living in an- 
other, there is the exchange of the results of ef- 
fort through space. As there is the exchange of 
the results of effort produced at one time for those 
produced at another, there is the exchange of the 
results of effort through time. 

Exchange implies possession, and possession 
implies property. The essence of property is the 
right to hold, use, and dispose at will. It has been 
held for the common good that rights to property 
shall be protected by law. This means that no' one 
shall be dispossessed of that in which he has prop- 
erty except for the common good as prescribed by 
law, and in no event unless he is accorded just 
compensation. 

During the ages throughout which the law of 
property developed, it was not understood that all 
forms of existence are due to the reaction and 

18 



PROPERTY IN MATTER AND FORCE 19 

interaction between force and matter. The con- 
ception of the rights of property applied to con- 
crete things — ^to forms of matter — and the con- 
ception of the rights to property in the main so 
applies to-day. 

Essential to property is the application of hu- 
man effort, which first brings into possession that 
in which there is property, and the putting forth 
of effort when necessary to protect the rights of 
property in that which has been brought into pos- 
session. Such effort is primarily exerted by the 
person in protecting his rights. It is reinforced 
by effort applied through governmental agencies 
— through the administration and enforcement of 
the law which rests upon the consensus of public 
opinion that rights in property must be recognized 
and maintained. There may be property in land 
itself and in that which exists in or grows out of 
the land — in timber in the forest, minerals in their 
beds, in the birds and beasts that inhabit the land. 
There may be property in water, in the things, ani- 
mate and inanimate, that exist therein. 

The right to property is not only the right to 
hold, use, and dispose of that in which a person 
has property, but also to hold, use, and dispose 
of that which is produced through the utilization 
of that in which he has property. Thus man has 
property not only in the soil but also in the crops 
yielded by the soil, not only in animals but also in 
their young; he has property in the substance 



20 THE FLOW OF VALUE 

which he transforms and in the things into which 
it is transformed. 

Man not only uses and disposes of forms of 
matter but he uses and disposes of measures of 
force. The very use and disposition of matter 
necessarily involves the use and disposition of 
force. The results of his efforts are due as much 
to the application of force as to the matter to 
which force is applied. 

The right to property in the force which man 
directs to his ends has an implied recognition in 
the law. In the sense that a man has the right 
either to use or to dispose of the right to use the 
force thereof, he has property in his body and his 
brain. There is also the potentiality of such force. 
A man may use and dispose of his effort to-day. 
He may determine thus to put forth effort to-mor- 
row or not to do so. Men who direct and co- 
ordinate the efforts of other men do not have 
property in the bodies and brains of these other 
men, although the former may have property in 
the results obtained by the application of their 
efforts. Property in a waterfall certainly in- 
cludes the right to use and dispose of the force 
generated by the water. As there is property in 
the steam-engine, the gas-engine, the dynamo, and 
in the substances utilized in the generation of force 
by them, it would seem that there is property in 
the force generated and applied. This force may 
be used, or the right to its utilization may be dis- 



PROPERTY IN MATTER AND FORCE 21 

posed of. There is also the potentiality of such 
force. Through engine and machinery the owner 
may generate and apply force to-day. He may 
determine so to generate and apply force to-mor- 
row or not to do so. 

Concrete things are of definite measurement; 
therefore the property of persons in them may be 
exactly defined and limited. The limit within 
which man exercises control and beyond which he 
does not exercise control over the forces that per- 
vade the universe is often difficult of perception, 
and, therefore, the degrees of his property in 
force may not always be susceptible of exact defini- 
tion. In a measure he makes the force of gravity 
serve his ends, but in vastly greater measure it is 
beyond his control. The force of wind and wave 
to a degree he utilizes, but the ebb and flow of 
their mighty currents is regardless of his will. 
Although the essential processes of organic life 
are even beyond his knowledge, by planting seed 
of a given kind in soil in which he has property he 
determines the kinds of crops that will be yielded, 
in large measure their quality and quantity; by 
the manner of breeding animals he determines the 
kinds that will be propagated, and in large meas- 
ure their qualities and their number. He thus to 
an extent directs the manifestation of the life- 
giving forces themselves. 

The written law has defined the rights to prop- 
erty m matter; it has not as yet fully defined the 



^2 THE FLOW OF VALUE 

rights to property in force. The law of copyright 
and the patent law affirm the right to property in 
composition or invention, the result of force em- 
anating from the human brain; and the mechan- 
ic's lien protects the right to the wage due in 
return for the effort of the artisan. There is, 
however, lack of general recognition of the fact 
that to the mental effort of those who direct and 
coordinate the application of force, is due the pro- 
duction in greater volume than otherwise would be 
possible of the things that men use and consume. 
It is not only the concrete things in which a man 
or a business organization has property that con- 
duce to the most effective production of things and 
services that meet the wants of human kind, but in 
greater measure the brains of those who give that 
arrangement to these concrete things which en- 
ables their most effective utilization, and so direct 
and coordinate the application of force to them 
and through them that the most effective result is 
obtained. 



Ill 

UTILITY AND UTILITIES 

In this chapter necessarily begins the formation 
of definitions and use of the terms defined. There 
can not be discussion, or even expression, with- 
out designation. The use of a designation im- 
plies cognizance of that to which it is applied 
and of all to which it may be applied. Therefore 
definition and classification are correlative with 
designation. 

Much of discussion is futile because those tak- 
ing part ascribe different meanings to the same 
term: not infrequently the same term may be 
used in different meanings by the same person, 
and not always because of mental confusion. In 
greater part, perhaps, it is due to what is com- 
monly said to be the difficulty of arriving at clear- 
cut definition and exact classification. When there 
is the attempt to define or classify different phases 
of the flow of existence the difficulty becomes an 
impossibility. One phase so merges into another 
that there can not be a definition or a classification 
that will include all it is desired to include, or ex- 
clude all it is desired to exclude. There is evi- 

23 



24 THE FLOW OF VALUE 

dence of this in the uncertain distinction between 
hummock and hill, hill and mountain, between 
brook, creek, and river. 

This impossibility is a correlative of evolution 
and incidentally affords a degree of verification of 
the theory of evolution. All of the forms of ex- 
istence proceed from the transmutation of force 
and the transformation of matter. As there is 
this transmutation and transformation, forms of 
existence are derived from preceding forms. Dif- 
ferentiation proceeds through a succession of 
phases before there is a clear-cut distinction be- 
tween different forms that have developed from a 
common antecedent. There can not be clear-cut 
definition where there is not clear-cut distinction. 
For example, although every one knows what is a 
plant and what is an animal, there are organisms 
that have characteristics of both and thus can not 
clearly be placed in one group or the other. Of 
these are certain kinds of bacteria that are said 
by zoologists to be animals and by botanists to be 
plants. The presence of chlorophyll or of cellu- 
lose is supposed to be a distinguishing character- 
istic of plants, yet there are forms of animal life 
that have chlorophyll and others that have cellu- 
lose. The power of locomotion is presumably a 
characteristic of the animal, yet there are forms of 
plant life having this power. Indeed there are 
biologists who tell us there is no conclusive justi- 
fication for the grouping of living things as be- 



UTILITY AND UTILITIES 25 

longing to the so-called plant kingdom or the so- 
called animal kingdom. 

Another example. There apparently is a palp- 
able distinction between the ground surrounding 
a dwelling and a farm. The householder may de- 
vote part of the ground to raising garden truck 
for his own use ; he may give a portion of the truck 
to a neighbor or sell portions to one or more neigh- 
bors or to the grocer for resale. The ground may 
be a quarter acre or less, a half acre, an acre, or 
more. He may employ a gardener, whether or 
not he sell any of the produce. What is a farm? 
The census bureau has had difficulty in determin- 
ing and has not always adhered to the same defini- 
tion from one census to another. Again, every 
one knows the difference between a locomotive and 
a train of cars. Yet when a locomotive is run- 
ning on a main railroad track it must have signals 
at front and rear, and a train number for record 
and the reception of running orders, the same as 
though it pulled a number of cars. Every one 
knows the difference between a passenger train 
and a freight ^rain, yet there are trains composed 
of both passenger cars and freight cars, and these 
*^ mixed trains'' have been a bothersome item in 
railroad statistics. 

Then again, new words have not always come 
into use as the mind has progressed in discriminat- 
ing perception. A word that has had a simple 
meaning may come to be used in various senses 



26 THE FLOW OF VALUE 

related to the original significance. For example, 
impact of the hand is a blow, and motion of 
the air that may give impact is the blowing of the 
wind. There is the sense of shock. This leads in 
one direction to the designation of the weighty 
impact of a steam hammer as a blow, and in an- 
other direction to the designation of a sudden 
pain, disappointment, or grief as a blow. As the 
blowing of the wind typifies the unsubstantial, 
boasting comes to be designated as blowing, and 
the braggart as a blow or a blow hard. The dic- 
tionary presents a multitude of examples of this 
differing use of the same word. 

Therefore all that can be expected of a defini- 
tion or a classification is that it applies to forms 
of matter or kinds of force that are so differen- 
tiated as to be distinguishable in the main from 
other forms or kinds ; that is, that a term be of the 
utmost serviceableness which the persistent blend- 
ing of one phase of existence into another permits. 

The enunciation of a principle, a rule, or a law 
is beset with similar limitations. The flow of 
cause and effect is in such ramifications that there 
will be exceptions to any formula, save in the ex- 
actness of mathematical abstraction. Yet there 
may be such perception of a certain sequence in 
great groups of phenomena as to justify general- 
ization. All that can be expected of such general- 
ization is that it will be serviceable in determining 
the flow of phenomena in an overwhelmingly pre- 



UTILITY AND UTILITIES Tl 

ponderani number of the cases to which it is ap- 
plied. 

Toward meeting his wants man utilizes matter 
in vast aggregates, in manifold combinations, and 
in minute subdivisions. He utilizes force in 
mighty currents and in infinitesimal pulsation. 
Matter is of infinite variety and innumerable 
designations: force is of many kinds and many 
designations. There needs to be a term for the 
designation in common of every form of matter 
and every form of force that man uses for his 
purposes. 

That which meets a want is utilized : that which 
serves as an instrumentality toward meeting a 
want is utilized. Therefore the term that has been 
generally adopted to signify any thing or any 
service utilized is a ^^ utility.'' Anything that 
man uses, no matter how large or how small, is a 
utility. An aggregate that he uses is a utility: 
a component part of that aggregate which he uses 
is a utility. A thing or a service utilized in pro- 
duction is a utility, and a thing or a service pro- 
duced is a utility. Any thing or service that man 
uses, no matter for what purpose, is a utility. 
That is, a thing or a service used because it is 
needed is a utility; a thing or a service used be- 
cause of the gratification it affords is a utility, 
whether or not it conduces to well-being. 

Industry and commerce have to do with the pro- 



28 THE FLOW OF VALUE 

duction and exchange of things and services for 
the purpose of satisfying needs or gratifying de- 
sires; that is, for the purpose of meeting wants. 
Science has been defined as organized knowledge. 
The science of economics is concerned with the 
organization of knowledge that pertains to the 
production and exchange of things and services. 
Thus industry and commerce in the concrete and 
the science of economics in the abstract are con- 
cerned with the production and exchange of utili- 
ties. 

A utility for which another utility or other 
utilities are or can be obtained is an ** economic 
utility.'' Inasmuch as nearly all utilities are eco- 
nomic utilities, the term utility will be used 
throughout this volume, as a rule, in the sense of 
an economic utility. Where distinction or em- 
phasis seems desirable, the terms utility and eco- 
nomic utility will be used in their strict meaning; 
in other cases it is believed that the context will 
indicate the significance. 

Utilities are susceptible of different classifica- 
tions frona different standpoints. They may be 
classified as beneficial if they promote human wel- 
fare, as deleterious if they conduce to physical, 
mental, or moral impairment. 

As there may be utilities in the form of force 
and utilities in the form of matter, there may be 
a broad distinction between ^* matter-utilities'' and 



UTILITY AND UTILITIES 29 

^'force-utilities.'' Matter-utilities are measured 
by units of area, length, and weight, number and 
quantity. The significance of these units is 
heightened when there is indication not only of 
the kind but of the quality of matter-utilities by 
which they are measured. For example, a bushel 
measure indicates a receptacle that will hold a 
certain quantity; a bushel of wheat indicates a 
definite measure of a specified commodity; a 
bushel of No. 1 Northern wheat indicates a definite 
measure of a specified commodity of a specified 
quality. External force applied by man is meas- 
ured by such units as foot-pounds, horse-power, 
the kilowatt-hour. Force in the form of human 
effort may be measured by its application during 
a period of time — an hour, a day, a week, a month, 
a year. The significance of such measurement is 
heightened by indication of the quality of the ef- 
fort. For example, a week's work of a first class 
carpenter is more effective than that of an ap- 
prentice. Or it may be measured by the result 
immediately traceable to its exertion; for ex- 
ample, in simple physical manifestation by the 
pound of cotton picked; in physical and mental 
manifestation by the number of pages typewrit- 
ten; in mental and emotional manifestation by 
the quality of a picture, a manuscript, of the de- 
livery of an address, of the performance of a mu- 
sical composition, or of a part in a play. A meas- 
ure of human force is also afforded by the results 



30 THE FLOW OF VALUE 

traceable to the effort of the brain in coordinating 
the application of human effort and cosmic force. 
For example, there may be two mills with exactly 
the same equipment and yet the manager of one, 
by the skilful handling of men, substance, and 
machinery, may produce a greater output in a 
given time than the other, or an equal output with 
fewer employees. Under skilful management a 
factory, a department store, a hotel, a railroad 
may be operated at a profit, although under less 
efficient management a loss would be incurred. 
Thus the mental effort which conceives, designs, 
guides, and directs is certainly of higher im- 
portance than the force which it applies or the 
matter to which it is applied. 

The classification of matter-utilities that will be 
most serviceable in this discussion is into final 
utilities, sources of substance, substance, inter- 
mediate utilities, and instruments of production. 

Utilities which through immediate use or con- 
sumption directly minister to physical or mental 
wants of the individual may be designated as 
**final utilities.'' Of such are food, clothing, shel- 
ter, books, pictures, personal service. With the 
exception of food, such utilities are susceptible of 
utilization throughout varying periods and, there- 
fore, each measure of satisfaction afforded is a 
utility. Such a utility was an economic utility 
when the owner obtained it in exchange. It con- 



UTILITY AND UTILITIES 31 

tinues to be an economic utility as long as other 
utilities can be obtained in exchange for it. Each 
measure of satisfaction afforded is an economic 
utility if other utilities can be obtained in exchange 
for it. For example, the right to utilize a dwell- 
ing may be disposed of for a year, of a room for a 
week, of a bed in a lodging house for a night. 

Utilities from which utilities in the form of sub- 
stance are gathered or extracted for transforma- 
tion may be classified as *^ sources of substance.'* 
Of such are farms, forests, and mines. 

Utilities composed of forms of matter extracted 
from or growing out of the lands and waters that 
are suitable for transformation into other utilities 
may be classified as *^ substance." Of such are 
timber, grain, and minerals, cotton and flax, the 
animals whose flesh is transformed into food, 
and covering into clothing and other forms of 
use. 

Utilities in the form of substance in one or an- 
other stage of transformation may be classified as 
** intermediate utilities.'' Of such are flour, wool, 
leather, logs, and ingots. 

Utilities which do not directly minister to the 
wants of the individual but are utilized in the pro- 
duction of other utilities may be classified as * in- 
struments of production." Of such are struc- 
tures, machines, and appliances. Each measure 
of matter and each measure of force flowing from 
their utilization may be a utility. 



32 THE FLOW OF VALUE 

In the light of these definitions we perceive that 
all the activity outlined in the first chapter is ex- 
erted in the production of utilities. Instant by 
instant, there is the transmutation of force and 
the transformation of matter in every phase of the 
production of all kinds of utilities. Every phase 
and stage of production requires time that varies 
with utilities of different kinds. Existing utili- 
ties have been produced by the application of force 
to matter in the past. The application of force 
to them in the present results in the production 
of utilities in the future. To these future utilities 
force may be applied in the production of utilities 
for use in the more remote future, and so on in 
unending series. 

Utilities are produced and are consumed, but 
that which constitutes a utility can not come from 
nothing and can not pass into nothing. As a util- 
ity is used and consumed, it disintegrates and is 
resolved again into elements of matter and force. 
Utilities in the form of food pass out of existence 
as utilities when they are consumed, but their con- 
sumption promotes vitality. Human effort arises 
from vitality. Human effort becomes a utility 
when exerted in the production of future utilities. 

In all utilities there is property. If every per- 
son could provide all of the utilities that meet his 
wants entirely and exclusively through the exer- 
tion of his own efforts, he might have property in 
utilities utilized in such production and in the 



UTILITY AND UTILITIES 33 

utilities produced, but there would -be no transfer 
of property. 

Inasmuch as all persons engaged in production 
are continually providing utilities that other per- 
sons use, it follows that there must be continual 
transfer of property in order that utilities may 
come into the possession of those whose wants 
they serve, or of those who utilize them toward 
serving wants. Obviously there must be some 
means for effecting this transfer, of exchanging 
utilities of the past, the present, and the future. 



rv 



THE EXCHANGE OF UTILITIES AND THE 
UNIT OF EXCHANGE 

Inasmuch as every person is dependent upon 
the efforts of others for the maintenance of a 
civilized existence, one who renders no return for 
the benefits he receives certainly leads a selfish 
life, and selfishness is universally condemned. It 
is the precept of philosophy and religion that each 
person do as much as he can for others. If every 
person does as much as he can for others, every 
person is contributing to the benefit of others in 
the fullest measure that is possible for him. This 
means that as a person is contributing to the ben- 
efit of others, they are contributing to his benefit : 
there is an exchange of benefits. 

It was not, however, because of precept of phi- 
losopher or priest that the exchange of the results 
of efforts began. Primitive man, in common with 
the lower animals, was obliged to look out for him- 
self. He took what he wanted, when and where 
he found it. Selfishness necessarily was of the 
essence of his nature, tempered by the need and 
the developing desire to care for his family. Thus 
it was that things were owned in common by a 

34 



THE EXCHANGE OF UTILITIES 35 

family, and as the family developed into the tribe 
things were owned in common by the tribe. This 
was the state of self-sufficiency. When a tribe had 
more things of a kind than it wanted, the patriarch 
was not prompted to give of the abundance to 
another. Tribes were then more inclined to fight. 

But in the long course of time it was found that 
when one tribe had more things of a kind than it 
wanted and another had more things of a kind 
than it wanted, each could benefit by the exchange 
of its surplus. As the tribal relation dissolved, 
exchange developed between individuals. Ex- 
change served a selfish end in that each obtained 
something he wanted: it served an altruistic end 
in that each rendered to the other something he 
wanted. 

There can not be the exchange of utilities un- 
less each party has that which the other wants. 
Thus in economic parlance ^^want'^ signifies not 
only that a person desires a thing but that he has 
that in exchange for which it may be obtained. 
This excludes want in the sense of desire for a 
thing which may be unattainable. Similarly in 
economic parlance *^ demand^' signifies the offer- 
ing of that in return for which that which meets 
a want may be obtained. This excludes demand 
in such a sense as that of the highwayman who de- 
mands that a traveler give his purse. Therefore 
throughout this volume ^'wanf will be used in the 
sense of potential ^ * demand. ' ' 



36 THE FLOW OF VALUE 

It is a principle rooted in human nature tliat 
in an exchange each person yields as little as he 
can in return for that which he acquires — each 
person seeks to obtain as much as he can in return 
for that with which he parts. This gives rise to 
bargaining. Men seek to obtain that which they 
want, from him who will accept the least in ex- 
change for it; men seek to dispose of that with 
which they are willing to part, to him who will 
yield the most in return for it. Therefore this un- 
derlying principle also gives rise to competition; 
or, rather, bargaining and competition are cor- 
relative. 

Bargaining serves a selfish end in that it tends 
to each parting with the least and receiving the 
most he can. It also serves an altruistic end in 
that it tends to each rendering to the other the 
largest measure of that which he wants in return 
for the smallest measure of that with which he will 
part. 

Demand for utilities leads men to supply utili- 
ties. Each must supply that for which there is 
demand in order that he may obtain that which he 
demands himself. 

The form and functions of the body developed 
before there was a pronounced advance in the 
growth of the mind. Therefore the earliest hu- 
man effort was that of the body directed by a rudi- 
mentary intelligence. As food is the primary ne- 



THE EXCHANGE OF UTILITIES 37 

cessity to animate existence, effort was instinct- 
ively put forth in procuring food. First man 
hunted; then he domesticated animals and tilled 
the soil. By slow degrees he learned to make 
tools and to make things with tools. For ages 
self-sufficiency enveloped the family and the tribe. 
The industry and commerce of the western world 
evolved out of the self-sufficiency of the medieval 
communities. 

There emerged from the tillers of the soil the 
artisan, who went from house to house, working 
the substance furnished by his patron into the 
forms desired. His effort was applied in ex- 
change for the food and clothing also provided by 
his patron; that is, he was paid *4n kind.'' Then 
evolved the craftsman, who worked in his own 
shop with his own tools and supplied the substance 
which he wrought into the form desired by his 
customers. Then craftsmen came to make wares 
in excess of those for which they had definite or- 
der and took them to the fairs. Then traders 
bought wares from the craftsmen for sale at the 
fairs and elsewhere. Then, whether craftsmen 
employed a factor to sell the wares they produced, 
or whether a trader employed craftsmen to pro- 
duce the wares he sold, there evolved the mer- 
chant with a fixed place of business. 

Although the medieval wares were of no great 
variety, as the number of producers and the num- 
ber of purchasers increased there came to be some- 



68 THE FLOW OF VALUE 

thing like definiteness in the ratios in which things 
of one kind were exchanged for things of another 
kind. 

In every exchange each party renders utilities 
to the other in exchange for the utilities he re- 
ceives. Thus he sells the utilities with which he 
parts and is paid for them. Likewise he buys the 
utilities he receives and pays for them. Ob- 
viously there must be a term to designate that 
which is paid and that which is received. This is 
price. 

Price is that paid for a utility when it is bought, 
or obversely that which is received for a utility 
when it is sold. Therefore the price of a utility 
cannot be indicated in terms of that utility. It 
must be indicated in terms of that for which it is 
bought or for which it is sold. 

When there is the coincident transfer of prop- 
erty in utilities, the price of each utility is that of 
the other. If property in a utility of one kind be 
exchanged for property in a dozen utilities of an- 
other kind, the price of the dozen utilities of the 
one kind is the one utility of the other kind, and 
the price of the utility of the one kind is the dozen 
utilities of the other. 

When utilities of one kind are exchanged di- 
rectly for utilities of another kind, each party ob- 
tains at once that which he wants in return for 
that with which he parts. But if a person have 
utilities and another person wants them but does 



THE EXCHANGE OF UTILITIES 39 

not have utilities which their owner will accept, he 
must render in exchange that for which he can 
obtain from whosoever may have them the utili- 
ties he does want. Thus there must be an inter- 
mediary of exchange. 

Such an intermediary at first was a thing of 
usefulness in itself, of such universal usefulness 
that it could be disposed of at any time by any 
person in exchange for anything he might want, 
and would be accepted at any time by any person 
in return for that with which he wanted to part. 
Of such things were the cattle of the Greeks, the 
tobacco of the early American settlers. Because 
of their durability, portability, and divisibility, 
the metals came generally to be adopted as the 
media of exchange. Gold and silver tended to 
displace the other metals for this purpose, and 
hence to be designated the precious metals. In 
order that there might be known just what meas- 
ure of metal passed from one to another, the met- 
als were transformed into coins that were pre- 
scribed to be of definite weight and quality. 

Then it came about that coins were sought by 
many apparently for no other purpose than to 
possess them. The acquisitive instinct found ex- 
pression in acquiring coins. But that which gave 
coins their general usefulness was the fact that 
any thing or any service could be obtained for 
them. Therefore it was that a coin of a given 
weight and fineness became the unit of exchange. 



40 THE FLOW OF VALUE 

A certain number or quantity of utilities of each 
kind could be obtained in exchange for a coin, 
which is the same as to say that a coin could be 
obtained in exchange for a certain number or 
quantity of utilities. Thus this number or quan- 
tity of utilities of a respective kind had the ex- 
change ratio of the unit of exchange. This num- 
ber or quantity was exchangeable for the coin 
which was the concrete embodiment of the unit of 
exchange. The coin in turn was exchangeable 
for that measure of utilities of another kind which 
had the exchange ratio of the unit of exchange. 
Therefore it essentially was that the measure of 
utilities of one kind, which had the exchange ratio 
of the unit of exchange, was exchangeable for the 
measure of utilities of another kind, which had 
the exchange ratio of the unit of exchange. Were 
there not a unit of exchange, there would have to 
be a tabulation of the ratios in which utilities of 
each kind were exchangeable. 

It is obvious that any one of a variety of units 
may serve to indicate these exchange relations. 
Just as linear relation to space may be measured 
by such different units as the yard, the meter, the 
verst, so also may the relation of utilities from 
the standpoint of exchange be indicated by such 
different units as the pound sterling, the franc, 
the mark, the florin, the ruble, the peseta, the 
dollar. Naturally the unit of exchange in general 
use by a given people is that which will indicate 



THE EXCHANGE OF UTILITIES 41 

the respective measures of utilities that most 
frequently enter into exchange. For example, in 
China when exchanges were in small quantities the 
*^cash^' was the unit; in Great Britain where a 
great variety of utilities enter into exchange and 
in larger volume the pound sterling is the unit. 
Or, as there may be the transfer of property in 
large or small measures of utilities, there may be 
a unit to which a less and another unit to which 
a greater measure of utilities niay have the ratio 
of exchange. For example, in Great Britain there 
is the shilling as well as the pound sterling. In 
fractions or multiples of any unit of exchange may 
be expressed the exchange relativity of any num- 
ber or quantity of any utility. In the United 
States the unit of exchange is the dollar. 

It is to be emphasized that, as the unit of ex- 
change indicates the measure of utilities of each 
kind which has the exchange ratio of that unit, it 
indicates the measures in which utilities of all 
kinds are exchangeable, those of one kind for those 
of another kind. Thus while the term that desig- 
nates the unit of exchange is the designation of a 
coin, it is also the designation of the relativity of 
utilities in exchange. Thus the unit of exchange 
is the designation of respective measures of re- 
spective utilities that are exchangeable, one for 
another. Therefore the coin tends to disappear 
as an intermediary, and the unit of exchange comes 



42 THE FLOW OF VALUE 

not in actuality to be based upon coin, but upon 
the utilities that are bought and sold. This ten- 
dency is perceptible throughout an evolution not 
as yet consummated. 

The first stage in this evolution was attained 
when in the course of tinae the actual transfer of 
coins came in large measure to be obviated as their 
use was supplemented by government notes and 
bank notes. Such an mstrument is a promise to 
pay coin, and thus it may be used instead of coin 
as an intermediary of exchange. But as the desig- 
nation of a coin is also an indication of the unit 
to which utilities have an exchange ratio, a govern- 
ment note or a bank note, aside from its correla- 
tion with coin, facilitates the transfer of property 
in utilities in that it may pass from one to another 
in an indefinite series of exchanges without being 
redeemed in coin. 

Then in the longer course of time it was found 
that exchanges could be effected by debit entries 
and credit entries on the books of banks in accord- 
ance with the amounts specified in written instru- 
ments. Such instruments include checks, drafts, 
bills of exchange, and acceptances. They are ex- 
pressed in terms of the units that designate coin 
and that therefore also indicate the exchange ra- 
tios of utilities. Their essential function, aside 
from any correlation with coin or the metals of 
which coin is made, is to facilitate the transfer of 



THE EXCHANGE OF UTILITIES 43 

property in utilities in accordance with their ex- 
change relativity, which less and less depends upon 
any relation of utilities to coin. Coin, govern- 
ment notes, and bank notes are designated as cur- 
rency because they flow as a current from any 
person to any other person. Bank credit, and the 
instruments in accordance with which it is trans- 
ferred, are not currency, because the flow is from 
a designated person to a designated person. The 
more readily utilities or the instruments by means 
of which property in them is transferred flow in 
the currents of exchange, the greater is their 
liquidity. 

There can not be the transfer of property, that 
is, there can not be buying and selling, without at 
least two persons being concerned, he from whom 
the property passes and he by whom it is received. 
If, at the time A transfers property in certain 
utilities to B, B in turn transfers property in 
other utilities to A, the results of effort owned by 
A have been exchanged for the results of effort 
owned by B, and the transaction is complete. 

If, at the time of the transfer of property in 
utilities from A to B, the latter made payment in 
coin, bank notes, or government notes, the trans- 
action, in a sense, would also be complete, because 
A could immediately exchange the currency for 
other utilities. Or he could retain it in his posses- 



44 THE FLOW OF VALUE 

sion for future exchange, or, as banks developed, 
he might deposit it in a bank, where it would be 
placed to his credit. 

The word credit has several meanings and 
shades of meaning. Its underlying significance is 
positive not negative. When it is said of a man, 
**It is to his credit that he is upright and honest,'' 
or, **He is entitled to credit for having done this 
or that," positive qualities or positive perform- 
ance is implied. **He is credited with this or 
that,'' implies recognition of positive perform- 
ance. This leads to the significance of credit in 
commerce as that which has been obtained, that 
which may be used or disposed of. It also signi- 
fies return which is due for property that has been 
transferred. Thus, for example, if A have prop- 
erty in a dozen cattle, the cattle are to his credit. 
If he dispose of the cattle for 240 dollars in coin, 
government notes, or bank notes, the currency is 
to his credit. If he deposit the currency in a bank 
it is placed to his credit. He can use or dispose 
of that which is placed to his credit. Therefore, 
that which is to his credit is command over util- 
ities. Credits in the form of coins, government 
notes, bank notes, or credit entries on the books of 
a bank is immediately utilizable command over 
utilities. Their owner can expend them in any 
proportions for any utilities he may want. Prop- 
erty in other utilities must be transmuted into 
such credits before it is so utilizable. 



THE EXCHANGE OF UTILITIES 45 

A debt is that which is due for property in util- 
ities that has been transferred, but in return for 
which there has not been an immediate transfer of 
property in other utilities. In general usage, 
when there has been such a transaction the pur- 
chaser is said to have obtained the property **on 
credit/' A better expression is that he has ob- 
tained the property *^on trust,'' because trust 
that he will make payment is reposed in him. 
If he has an established reputation for paying for 
that which he purchases, it is said that his ** credit 
is good." A purchase on trust means that a debit 
has been incurred by the purchaser. For exam- 
ple, if, when A disposed of the dozen cattle to B, 
the latter did not make immediate payment, he 
would be in the debt of A in the amount of 240 
dollars. The significance of debt is negative. It 
implies the receiving of that in return for which 
the positive must be forthcoming. A credit is 
required to balance a debit. 

Every transfer of property involves credit and 
debit. Every commercial transaction gives rise 
to debit for that which is obtained, and to credit 
for that which is transferred. Debits and credits 
are in terms of the units of exchange. Utilities 
received which give rise to debit may be utilized 
in the production of future utilities which give 
rise to credit. Then again, utilities which have 
given rise to a debit may be used and consumed 
before there is the production of utilities that 



46 THE FLOW OF VALUE 

balance the credit to Mm from whom they were 
obtained. A credit means that utilities have been 
produced and property in them transferred. A 
debit means that utilities must be forthcoming 
and property in them transferred. 

A man may keep account with anything in 
which he has property, debiting it with that which 
he puts into i't and crediting it with that which he 
takes out of it. Thus A may have debited the 
dozen cattle with all of the food and care given 
them, and finally credited them with the 240 dol- 
lars received for them. 

This 240 dollars definitely indicates the ratio 
at which the cattle were exchanged; that is, the 
dozen cattle were of the exchange ratio of 240 
dollars. In this sense dollars indicate utilities, 
not something separate and distinct from utilities. 
As we have learned, the first intermediary of ex- 
cha.nge was something separate and distinct from 
the utilities, the transfer of property in which 
was effected by means of it. That is, the in- 
termediary of exchange was itself a concrete util- 
ity. When metals were used they were also con- 
crete utilities exchanged for concrete utilities. 
In the form of coins they continued to be utilities, 
but their usefulness as coins came to outweigh 
their usefulness as concrete utilities in other ways. 
The use of bank notes and government notes was 
a step toward the interchange of debits and cred- 
its without resort to coin. The use of debit en- 



THE EXCHANGE OF UTILITIES 47 

tries and credit entries on the books of banks 
marks the exchange of utilities without a concrete 
utility as an intermediary of exchange. But bank 
credit, although not a concrete utility, is a utility, 
in that it may be exchanged for utilities and util- 
ities may be exchanged for it. It is a record of 
utilities that have been sold for which other util- 
ities are due in return. The unit of exchange 
that once was a definite measure of a concrete 
utility now becomes a unit of measurement of 
utilities in their relation of exchange, just as a 
yard is a unit of measurement of linear relation 
to space, and a pound is a unit of measurement 
of relation to the force of gravity. 

The evolution of the mechanism by means of 
which property in utilities is transferred makes 
clear that at this time the essential significance 
of the dollar is not of something separate and dis- 
tinct from the utilities that are exchanged, any 
more than a yard or a pound is something separate 
and distinct from the forms of matter measured 
by these units. Inasmuch as a yard or a pound 
may be applied in the measurement of different 
kinds of matter, we can speak of yards or pounds 
without definite specification of particular forms 
of matter. So also, as the dollar is the unit by 
which utilities of any kind are measured from the 
standpoint of the exchange of property in them, 
we can speak of dollars without definite specifi- 
cation of particular utilities. When, however, we 



48 THE FLOW OF VALUE 

thus speak of yards or pounds there is implied 
reference to forms of matter. So also, when we 
thus speak of dollars there is implied reference to 
utilities. There can not be yards or pounds of 
intangible space, and in this sense there can not 
be dollars except as measures of definite utilities 
in their relation of exchange. 

There is, however, a radical difference between 
the yard and the pound as units of measurement 
of tangible things, and the dollar as a unit of meas- 
urement of definite utilities from the standpoint 
of exchange. As a rule, there is a constant re- 
lation of a given quantity of matter to the unit 
by which it is measured as a form of matter, but 
there is not a constant relation of a utility to 
the unit by which it is measured from the stand- 
point of exchange. The ratio of a utility to the 
unit of exchange, that is, the measure of a utility 
which will exchange for respective measures of 
other utilities, is determined by concurrence be- 
tween the different minds of different men. Be- 
cause of various promptings of the different minds 
of different men a given measure of utilities of a 
given kind may bear at one time or place a higher 
or lower ratio to the dollar than at another time 
or place, and thus respective measures of utili- 
ties of different kinds may bear at one time or 
place a higher or a lower ratio to the dollar than 
at another time or place. Therefore the unit of 
exchange is a shifting unit. 



THE EXCHANGE OF UTILITIES 49 

The dollar is the nexus at a given time or place 
of the ratios borne by respective measures of 
respective utilities one to another, each to the 
others, from the standpoint of the exchange of 
property in them at that time and place. More- 
over, as it is in terms of the dollar that he who 
sells utilities at one time may receive payment 
at another, and he who sells utilities at one place 
may receive payment at another, the dollar is 
the nexus of the exchange ratios of respective 
utilities at different times and different places. 

As the dollar thus focuses the exchange ratios 
of utilities of all kinds, it is the nexus of prices. 
For example, when we say that the price of a 
dozen eggs is fifty cents, of a pair of gloves one 
dollar, of a yard of carpet one dollar and a quar- 
ter, of a week^s work fifteen dollars, of a set of 
furniture twenty-five dollars, of an acre of land 
two hundred dollars, of a steam engine one thou- 
sand dollars, we mean that the ratios of these 
measures of these utilities to the dollar is respec- 
tively as one to one-half, one to one, one to one and 
a quarter, one to fifteen, one to twenty-five, one 
to two hundred, and one to one thousand. The 
nexus of the prices of these utilities is thus indi- 
cated aside and apart from actual buying and 
selling. 

Larger or smaller measures of a utility than 
that which has the ratio of one dollar may have 
the same proportionate ratio or they may have a 



50 THE FLOW OF VALUE 

less or greater ratio. For example, it may be 
that with eggs at fifty cents a dozen, one half 
dozen could be obtained for twenty-five cents or 
perhaps the dealer would ask thirty cents. It 
may be that of gloves at a dollar a pair, a half- 
dozen pairs could be obtained for six times one 
dollar or perhaps for five dollars. As the unit of 
exchange is the measure of price, it is in terms 
of the dollar that demand is expressed and in 
terms of the dollar that supply is expressed. 

The preceding chapters have developed that 
the life of civilization depends upon the exchange 
of things and services, upon the exchange by each 
person of the results of his efforts in return for 
the results of the efforts of others. As the things 
and services thus exchanged are utilized toward 
meeting human wants, they are designated as 
utilities. Therefore, the life of civilization de- 
pends upon the exchange of utilities, that is, upon 
the buying and selling of utilities. To this ex- 
change, this buying and selling, is requisite a unit 
of exchange, in terms of which may be indicated 
the measure of a utility of one kind that is ex- 
changeable for a measure of a utility of another 
kind, that is, the measures in which utilities of 
different kinds are exchangeable. In a country 
where there is no hampering governmental re- 
striction upon buying and selling, these exchange 
ratios are determined through bargaining and 



THE EXCHANGE OF UTILITIES 51 

competition. It is now necessary to trace more 
definitely the sequence of cause and effect in de- 
termining these exchange ratios ; that is, to ascer- 
tain how competitive price is determined, that 
is, the prices for sources of substance, substance, 
intermediate utilities, instruments of production, 
and final utilities, and the price, designated as 
wage, which is paid for human effort. 

As every thing or service that has price is a 
utility, and as the purpose of all utilities is to 
meet human wants or to be utilized toward meet- 
ing human wants, and as all utilities that are 
bought and all utilities that are sold are produced 
through the application of human effort, it fol- 
lows that prices arise from the relations between 
effort applied in producing utilities, and the wants 
which are met by the utilities produced. The pur- 
pose of the immediately succeeding chapters is to 
trace these relations through that reaction and in- 
teraction which results in prices. 



V 



A HYPOTHETICAL. DEVELOPMENT OF PEICES FOR 
FOODSTUFFS THE EMERGENCE OF PROFIT 

Among whatever people there has been the de- 
velopment of industry and commerce, it has been 
interrupted and modified by changing political 
and social conditions. Even if adequate data 
were available, an exposition of the actual prog- 
ress from the dawn of history or even from the 
Crusades would require hundreds of pages. But 
throughout the tortuous progress each stage has 
been determined by that which preceded it, and 
has borne a determinate relation to that which 
succeeded it. An understanding of the produc- 
tion, buying, and selling of utilities and the sig- 
nificance and effect of that production, buying, and 
selling can not be attained except through a trac- 
ing of the successive phases. There are, however, 
so many factors in the industrial and commercial 
mechanism of to-day that it would be confusing 
to review the integral development. It may be 
better to lead gradually through the evolution of 
the various factors to their interelation. The 
essential development and essential significance 

52 



PRICES FOR FOODSTUFFS 58 

may be unfolded through a series of hypothetical 
illustrations. 

Let us begin with a hypothetical outline of an 
evolution such as conceivably might have been 
that of the settlers on the American continent had 
they been devoid of communication with Europe. 
As it was, the families of the settlers, especially 
in the interior, were very nearly self-sufficient, the 
members of each cultivating for themselves land 
that could be had with little or no formality and 
making for themselves such things as they used. 

Because of differences in the size of different 
families, differences in the characteristics of the 
soil which they cultivated, and differences in their 
aptitude and application, there would be differ- 
ences in the quantities and qualities of the re- 
spective things produced by different families. 
There would be the tendency for each to produce 
a surplus beyond its own needs of that which it 
could produce to the best advantage. Thus one 
family might have an advantage in raising wheat 
and converting it into flour; another, in raising 
potatoes ; another, in raising sheep. There would 
come to be the- exchange of flour and potatoes, of 
flour and mutton, of mutton and potatoes. At 
first the respective proportions in which such 
things were exchanged would probably depend 
upon the relative intensity of the respective de- 
sires ; exchanges would probably continue through- 
out many years before there was anything like 



54 THE FLOW OF VALUE 

definiteness in the exchange ratios. But in the 
course of tinae the tendency would be toward ex- 
change in the measure which each party would 
accept of a utility of one of those kinds rather 
than produce it for himself. Thus, consciously 
or subconsciously, there would be recognition of 
the mutual saving of effort. 

Thus there would come to be established the 
ratio in which a utility of one kind would be ex- 
changed for a utility of another kind. Let us 
suppose it came to be that a sack of flour was ex- 
changed for two bushels of potatoes, a sack of 
flour for ten pounds of mutton, and two bushels 
of potatoes for ten pounds of mutton. Thus a 
sack of flour, two bushels of potatoes, and ten 
pounds of mutton would be the exchange ratios 
of these utilities, that is, would be the respective 
measures in which the utilities of the respective 
kinds would be exchanged, those of one kind for 
those of another. 

If every transaction were the coincident ex- 
change of a utility of one kind for a utility of an- 
other kind, no intermediary would be required. 
But if the head of a family raising flour trans- 
ferred a measure of flour to the head of a family 
raising potatoes, and were not at that time in 
need of potatoes, but did want mutton; or if for 
five sacks of flour he might want four bushels of 
potatoes and thirty pounds of mutton, the process 
of exchange would not be so simple. 



PRICES FOR FOODSTUFFS 55 

As one sack of flour, two bushels of potatoes, 
and ten pounds of mutton had the same exchange 
ratio, any one of these respective measures of a 
respective utility could be considered the unit of 
exchange; that is, such a particular measure of 
one of these utilities would be that for which could 
be obtained the respective measure of another of 
these utilities. Or there could be adopted for the 
unit of exchange a designation that would not need 
to be expressed in terms of flour, or of potatoes, 
or of mutton. Let us suppose that the community 
arrived at once at the conception of such a unit 
and designated it a ** dollar.'' The exchange ratio 
of flour would be one sack to one dollar, of pota- 
toes two bushels to one dollar, of mutton ten 
pounds to one dollar. 

This implies that this community arrived at the 
conception of a unit of exchange that was deter- 
mined by the exchange ratios of utilities and not 
dependent for its expression upon any one con- 
crete utility. Moreover, let us suppose that the 
community from the beginning effected exchanges 
by debits and credits in terms of this unit of 
exchange without the use of a concrete unit as an 
intermediary. In accordance with these suppo- 
sitions each party receiving utilities would render 
to the other a certificate specifying the number 
of dollars to which the utilities transferred bore 
the ratio of exchange. If the producer of flour 
transferred five sacks of flour to the grower of 



56 THE FLOW OF VALUE 

potatoes lie would receive his certificate for five 
dollars. If the producer of flour wanted four 
bushels of potatoes and thirty pounds of mutton, 
the certificate for five dollars would not serve 
his immediate purpose because it would not be 
so divisible that he could pay the potato-grower 
two dollars and the mutton-raiser three dollars. 

Let us, therefore, make the further supposition 
that the community advanced to the conception 
of a record of transactions on which the certificate 
for five dollars would be entered to the credit of 
the seller of flour. When he obtained four bushels 
of potatoes he would give his certificate in favor 
of the potato-grower for two dollars and it would 
be entered to the debit of the flour-seller's account 
on the record ; and when he obtained thirty pounds 
of mutton he would give his certificate for three 
dollars in favor of the mutton-raiser, which would 
be entered to the debit of the flour-seller's ac- 
count. 

The practice of the debtor giving a certificate 
at the time of each purchase and the creditor de- 
positing that certificate would result in all trans- 
actions being effected by means of certificates 
which would be deposited with the keeper of the 
record, and in the adjustment of all transactions 
through debit entries and credit entries on the rec- 
ord. Each certificate entered to the credit of a de- 
positor would certify that utilities had been pro- 
duced and transferred by him. Each certificate 



PRICES FOR FOODSTUFFS 57 

entered to the debit of a depositor would certify 
that utilities had been produced by another and re- 
ceived by him. Each credit entry would mean that 
the depositor had transferred to others the results 
of efforts having the exchange ratio of the dollars 
indicated. Each debit entry would mean that the 
depositor had received from others the results of 
efforts having the exchange ratio of the dollars 
indicated. The entries would be based on utilities 
actually produced and transferred. The dollars 
of entry would be symbols of transactions; the 
dollar of credit a symbol of utilities produced and 
sold, the dollar of debit a symbol of utilities pro- 
duced and received. 

The continuity of transactions would give rise 
to entries to the debit and to the credit of each 
depositor. The certificate would take the form 
of an order on the keeper of the record, drawn by 
one depositor in favor of another. It would be- 
come what Ave know as a check, and the place of 
record would perform a function of what we know 
as a bank. A check drawn by one depositor in 
favor of another would mean that he had received 
utilities having the exchange ratio of the dollars 
indicated, that the account of the drawer was to be 
debited and the account of the payee to be cred- 
ited in this amount. 

Let us trace the debit entries and credit entries 
that would have their origin in a series of sup- 
posititious transactions. As A obtained twenty 



58 THE FLOW OF VALUE 

bushels of potatoes from B, he would give B his 
certificate for ten dollars which would give rise 
to a debit entry and to a credit entry on the record 
thus: 

A B 

Dr. Cr. Dr. Cr. 

10 10 

As C obtained from A five sacks of flour, giving 
his check for five dollars, that amount would be 
entered to the debit of C and to the credit of A, 
making the record stand: 



A 
Dr. Cr. 
10 

5 


B C 
Dr. Cr. Dr. Cr. 
10 

5 


As B obtains from A five sacks of flour and gives 
his check for five dollars, the record becomes: 


A 

Dr. Cr. 

10 

5 
5 


B C 
Dr. Cr. Dr. Cr. 
10 

5 
5 



As B obtains from C fifty pounds of mutton and 
gives his check for ^ve dollars, the record be- 
comes : 

ABC 
Dr. Cr. Dr. Cr. Dr. Cr. 

10 10 



5 

5 5 



5 5 



PRICES FOR FOODSTUFFS 59 

As the record now stands the entries to the 
debit of each depositor amount to the same as the 
entries to his credit; that is, each account is bal- 
anced. For the twenty bushels of potatoes hav- 
ing the exchange ratio of ten dollars which A 
obtained from B, he has transferred five sacks 
of flour having the exchange ratio of five dollars 
to C, and five sacks of flour having the exchange 
ratio of ^ve dollars to B. In return for the 
twenty bushels of potatoes having the exchange 
ratio of ten dollars which B transferred to A, he 
received five sacks of flour having the exchange 
ratio of five dollars from A, and fifty pounds of 
mutton having the exchange ratio of five dollars 
from C. In return for the five sacks of flour hav- 
ing the exchange ratio of five dollars he received 
from A, C transferred to B fifty pounds of mut- 
ton having the exchange ratio of five dollars. 

While it is conceivable that the accounts of rec- 
ord might thus exactly balance at one time or 
another, this probably would rarely happen. The 
periods during which the utilities obtained by 
one family were consumed would not likely be 
coincident with the periods during which the util- 
ities obtained by other families were consumed. 
Regardless of the periods of consumption by each 
of respective quantities of one utility or another, 
A would continuously need potatoes and mutton, 
B would continuously need flour and mutton, and 
C, flour and potatoes. As wheat was harvested 



60 THE FLOW OF VALUE 

from season to season and converted into flour, as 
sheep were grown from season to season and con- 
verted into mutton, as potatoes were raised from 
season to season, there would be transfers of prop- 
erty in the utilities of each kind which would re- 
sult in a series of entries to the debit and to the 
credit of each account. A balance to the debit 
of any depositor would mean that there would 
be due from him utilities having the exchange 
ratio of the dollars indicated by that balance. 
He might cancel the debt with utilities then in 
existence, or at a future time with utilities sub- 
sequently produced. A balance to the credit of 
a depositor would mean that there would be due 
to him utilities having the exchange ratio of the 
dollars indicated by that balance. The payment 
to him might be with utilities then in existence, 
or at a future time with utilities subsequently 
produced. By means of debit entries and credit 
entries there would continue to be adjusted the 
continued exchange of the results of effort. Co- 
incident with the flow of the production of utilities 
and of the transfer of property in utilities would 
be the flow of debit and of credit entries. 

Profit is gain. Its germ was in the beginnings 
of exchange. When A, B, and C respectively ex- 
changed flour, mutton, and potatoes, each obtained 
gain, because each received that which he wanted 
more than that with which he had parted, because 



PRICES FOR FOODSTUFFS 61 

each had produced in excess of his own wants that 
with which he parted, and because each had pro- 
duced that surplus with less than the effort requi- 
site to produce that which he received. Had there 
not been mutual gain there would not have been 
exchange. Were there not exchange there would 
not be a unit of exchange. Respective measures 
of different utilities came to have a ratio to this 
unit, because their exchange in these measures re- 
sulted in mutual gain. 

Because of various conditions there may be a 
variation between one time and another and one 
place and another in the measure of a utility hav- 
ing the ratio of the unit of exchange. For exam- 
ple, a scant crop of wheat might lead A to de- 
mand more than one dollar for a sack of flour. 
This would mean that he wanted to pay less than 
a sack of flour for two bushels of potatoes or for 
ten pounds of mutton. The ratio of flour to the 
unit would fall; a smaller measure could be ob- 
tained for a dollar; its price would advance. If 
there was a continual diminution in the supply 
of flour in relation to the supply of potatoes and 
mutton, B would pay two bushels of potatoes and 
C ten pounds of mutton for diminishing measures 
of flour, until the measure that thus could be 
obtained would be so small that they would no 
longer derive gain. Then they would cease to 
exchange either potatoes or mutton for flour. 
Flour would no longer be an economic utility; it 



62 THE FLOW OF VALUE 

would not command price ; it would have no ratio 
to the unit of exchange. B and C would either 
have to produce flour themselves or provide a sub- 
stitute for it. A would have to do without 
potatoes or mutton unless he raised them him- 
self or produced some utility other than flour for 
which B and C would be willing to pay potatoes 
and mutton. 

If at the time there was a scant supply of flour 
there was also such a scant supply of potatoes that 
B would want more than a sack of flour or ten 
pounds of mutton for two bushels of potatoes, he 
probably would be able to obtain more mutton but 
not more flour. C would continue to buy flour and 
potatoes until more of mutton were demanded in 
return than he would pay. That is, he would con- 
tinue to buy flour and potatoes until there was no 
gain in doing so. Then A and B would have to 
raise mutton for themselves or do without it. 

On the other hand, if at a given time the supply 
of flour became so abundant that B would not pay 
as much as two bushels of potatoes for a sack of 
flour nor C as much as ten pounds of mutton for 
a sack of flour, the ratio of flour to the unit would 
rise, a greater measure could be obtained for a 
dollar, its price would fall. If the supply of flour 
continued to become more and more abundant in 
relation to the supply of potatoes and mutton, 
B and C would pay less and less for it, until A 
would not obtain sufficient from them to meet his 



PRICES FOR FOODSTUFFS 63 

wants. He might produce less of flour and re- 
sume the raising of potatoes and mutton. 

Thus we arrive at these deductions. If a util- 
ity can not be had except at a price so high that 
gain can not be derived from its purchase, it will 
not be bought and its production for sale will 
cease. Obversely, if the price obtainable for a 
utility be so low that gain can not be derived from 
its sale, its production for sale will cease. 

This chapter no more than outlines the factors 
that, under the conditions presupposed, would en- 
ter into the determination of prices for final util-' 
ities in the form of foodstuffs, the emergence of 
profit from their production and sale, and the 
effect of profit in determining what foodstuffs 
would be bought and sold. 

The prices for utilities in this chapter are illus- 
trative and not historical. Although they seem 
low in comparison with prices of subsequent pe- 
riods as expressed in dollars, they are not without 
a degree of verisimilitude when compared with 
prices of an early stage of development, such as 
that of the Colonial period of this country. It 
is part of the supposition that A, B, and C were 
self-sufficient in meeting wants other than those 
for flour, mutton, and potatoes, that is, that these 
were the only utilities for which exchange ratios 
had developed. 



VI 



A HYPOTHETICAL DEVELOPMENT OF PRICES FOR THE 

PRODUCTS OF ARTISANS, FOR SUBSTANCE AND 

OF WAGES 

As a community emerges from self-sufficiency 
obviously the utilities between which there is first 
established an exchange ratio are those that first 
become the subject of exchange. That is, the first 
economic utilities gave rise to the first buying and 
selling ; and it was the first economic utilities that 
were first bought and sold. The first economic 
utilities may have been foodstuffs, or they may 
have been the products of an artisan. But he who 
specialized in the production of certain essential 
utilities would have to be provided by others with 
the essential utilities he did not produce. There- 
fore specialization in the growing of foodstuffs 
which would lead to the differentiation of the 
farmer would also tend toward the differentiation 
of the artisan, and specialization in the handicrafts 
would tend toward the differentiation of the pro- 
ducer of foodstuffs. 

Under our hypothesis the first exchanges were 
of certain of the foodstuffs. Such differences in 
conditions of production as led them to become the 

64 



PRICES FOR PRODUCTS OF ARTISANS 65 

subject of exchange would affect the production 
of other utilities and cause them likewise to enter 
into exchange. For example, of the various per- 
sons engaged in making shoes it is inconceivable 
but that one would display greater aptitude than 
others. He would be called upon to make shoes 
not only for his own family, but the other fam- 
ilies would be glad to exchange of the things which 
they could produce at an advantage for the shoes 
which he could produce at an advantage. Thus 
shoes would become an economic utility. 

If this shoemaker, D, had been called upon to 
make the shoes for the families of A, B, and C, 
when they were otherwise self-sufficient, he would 
have gone from house to house, working into shoes 
the leather obtained from the hides of sheep killed 
by each of them. He would have received food 
and shelter from each family while at work for it. 
When he came to work in his own shop he would 
also have to receive food in return for the results 
of his effort in making shoes. There would have 
to be established the ratios in which shoes would 
be exchanged for food. Now let us suppose that 
to his annual nourishment were requisite five sacks 
of flour, ten bushels of potatoes, and fifty pounds 
of mutton. This would be the very least for which 
D could afford to desist from producing his own 
flour, potatoes, and mutton. If he were to make 
shoes for the families of A, B, and C, D would 
have to receive from them flour, potatoes, and mut- 



66 THE FLOW OF VALUE 

ton in these quantities. That is, he must receive 
annually from A flour of the exchange ratio of 
five dollars, from B potatoes of the exchange ratio 
of five dollars, and from C mutton of the exchange 
ratio of five dollars. As in an exchange each ob- 
tains as much as he can and parts with as little 
as he can, the tendency would be for A, B, and C 
respectively to pay D the least he would accept 
for making their annual supply of shoes. Let us 
suppose that each of them required two pairs of 
shoes a year. This would mean that A would 
have to pay two and one-half sacks of flour for a 
pair of shoes or continue to make them for him- 
self; and D would have to make a pair of shoes 
for two and one-half sacks of flour or raise the 
flour himself. Likewise B would have to pay ^ve 
bushels of potatoes for a pair of shoes, and C 
twenty-five pounds of mutton. D would be obliged 
to make two pairs of shoes a year for the requisite 
annual supply of Ave sacks of flour, two pairs of 
shoes a year for the requisite ten bushels of po- 
tatoes, and two pairs of shoes a year for the requi- 
site fifty pounds of mutton. As the exchange ra- 
tio of flour was one sack to the dollar, of potatoes 
two bushels to the dollar, and of mutton ten 
pounds to the dollar, the exchange ratio of a pair 
of shoes would become two and one-half dollars. 
It would take two and one-half dollars to buy a 
pair of shoes. 
When D came to work in his own shop he might 



PRICES FOR PRODUCTS OF ARTISANS 67 

have provided the leather from hides of sheep 
raised by himself, or more likely A, B, and C would 
continue for a time to furnish him the hides which 
he made into shoes for them. When, however, C 
came to produce mutton for families A and B, he 
would have a surplus of hides. Naturally C would 
be prompted to sell his surplus of hides to D, and 
D would find it advantageous to obtain hides 
from C. 

Thus hides would become an economic utility. 
Under this supposition they would be the first in- 
termediate utility; that is, the first substance for 
transformation into further utilities to become an 
economic utility. An exchange ratio would be es- 
tablished for hides; that is, a measure of hides 
would come to have a ratio to the dollar. 

While C probably would be willing to supply D 
with the hides to be transformed into shoes for C, 
he would not be willing to supply without return 
the hides used in making shoes for A and B. So 
long as the shoes made by D for A, B, and C 
brought him no more than his subsistence, he 
would not have anything wherewith to pay for 
hides. He could not buy hides from C unless he 
could obtain customers for additional shoes, from 
whom he would receive that which would enable 
him to pay for the hides. That is, D could not 
buy other than flour, mutton, and potatoes until 
he produced utilities in excess of those necessary 
to provide him with the flour, mutton, and pota- 



68 THE FLOW OF VALUE 

toes requisite to his subsistence. If for each pair 
of shoes in addition to the six pairs made for A, 
B, and C, D received two and one-half dollars, he 
would have to his credit that which he did not need 
to expend for flour, potatoes, and mutton. If he 
sold one additional pair of shoes, he would have 
two and one-half dollars to his credit which could 
be expended for more of flour, potatoes, or mut- 
ton, or which could be expended for hides. That 
is, he could expend the two and one-half dollars 
for personal gratification, or he could invest it 
toward further production. This is the second 
stage of profit. The first stage was in obtain- 
ing through exchange that produced with less ef- 
fort than would have been required of the recipi- 
ent. The second stage is marked by a surplus of 
that received for putting forth individual effort 
over that which is consumed by the individual. 

If to the production of hides were necessary the 
application of exclusive effort, they could not be 
produced by C unless he received the flour, pota- 
toes, and mutton requisite for his subsistence, but 
whatever he received for hides produced at the 
S'ame time as mutton would be in addition to what 
he received for the mutton. Hides would be a by- 
product of mutton. C would endeavor to obtain 
the most he could for the hides and D would en- 
deavor to pay the least he could for them. If to 
the making of each pair of shoes were necessary 
four pounds of hides, there would be required for 



PRICES FOR PRODUCTS OF ARTISANS 69 

the original six pairs of shoes made for A, B, and 
C twenty-four pounds of hides which they would 
furnish to D. If, working in his own shop, D made 
seven pairs of shoes, he would receive seventeen 
and one-half dollars. He would have to pay fif- 
teen dollars for flour, mutton, and potatoes, and 
thus he would have two and one-half dollars re- 
maining, which would be the most he could pay 
for the twenty-eight pounds of hides required in 
making the seven pairs of shoes. Therefore, if 
C drove the utmost possible bargain with him, 
D would be obliged to pay about nine cents a 
pound for hides. He could not pay more than 
this. The price might be as much less as C could 
be prevailed upon to accept. 

If D could obtain customers for all of the shoes 
he could make in the course of a year, that which 
he would receive would be limited by the number 
of shoes he could make. If he could make a pair 
of shoes a week, he could, in fifteen weeks, make 
sufficient to supply one pair to each person of 
families of five members of A, B, and C, and for 
them he would receive thirty-seven and one-half 
dollars. For these he would require sixty pounds 
of hides. C would have to sell his surplus of 
hides, or utilize them himself, or throw them away. 
He probably could not utilize them himself, and 
would be willing to take what he could get rather 
than throw them away. D would have to buy 
hides or desist from making shoes. As the ut- 



70 THE FLOW OF VALUE 

most that D could afford to pay for hides after he 
had reached the point where he could afford to 
buy them at all, was nine cents a pound, he might 
refuse to pay more and C to accept less. For the 
sixty pounds of hides D would pay a fraction less 
than five and one-half dollars. This added to his 
expenditure of fifteen dollars for flour, potatoes, 
and mutton would make twenty and one-half dol- 
lars. If he made no more shoes in the course of 
a year he would have remaining seventeen dollars, 
which would suffice to provide flour, mutton, and 
potatoes for a wife and leave more than enough 
to purchase the hides required for the shoes of 
himself and his wife. If D were able to make a 
pair of shoes a week, or in round numbers fifty 
pairs a year, he would, if he could obtain custom- 
ers for all of them, receive at the price of two and 
one-half dollars, one hundred and twenty-five dol- 
lars. Of this it would require seventy-five dollars 
a year to provide flour, potatoes, and mutton for 
a family of five persons. He could pay eighteen 
dollars for the requisite hides, and have thirty- 
two dollars remaining. This would be profit, con- 
sisting in the surplus received by an individual 
for utilities produced by his individual effort over 
that expended by him for the subsistence of his 
family and for payment to those from whom he 
obtained the substance utilized in production. 

In a state of complete self-sufficiency, the fam- 
ilies of A, B, and C wove into cloth the wool shorn 



PRICES FOR PRODUCTS OF ARTISANS 71 

from sheep they raised, and made the cloth into 
clothing for the respective members. As C came 
to produce the mutton consumed by families A and 
B, he would not only have a surplus of hides, but 
his flocks probably would so increase that he 
would also have a surplus of wool. It is incon- 
ceivable but that some one engaged in weaving 
wool into cloth and making cloth into clothing 
would develop greater aptitude than others. He 
would be called upon not only to make the clothes 
for his own family, but for the members of other 
families who would be glad to exchange with him 
the things they could produce at an advantage for 
the clothes he could produce at an advantage. 
Thus clothing would become an economic utility. 
This tailor E would have to obtain from C the 
wool which he would weave into cloth and make 
into clothing for the families of A, B, C, D, and E. 
Wool would become an economic utility. If to 
the nourishment of E were requisite the same 
quantities of flour, potatoes, and mutton as for 
D, and A, B, and C, and each required one suit of 
clothes a year, the exchange ratio of a suit of 
clothes, that is its price, would be ^yq dollars. 
The price for wool would be determined in the 
same manner as the price for hides. 

The fact that he no longer raised potatoes or 
mutton or made his own shoes or clothing, would 
enable A to plant more wheat, and to make more 
flour. Similarly, through the specialization of ef- 



72 . THE FLOW OF VALUE 

fort B <;ould raise more potatoes, C more of mut- 
ton, hides, and wool; D could make shoes, and E 
clothes to the limit of their respective capacity. 

To the extent that A could produce and sell 
flour in excess of that needed for the purchase of 
the potatoes^ mutton, and shoes consumed by him- 
self, he could provide potatoes, mutton, and shoes 
for a family. To the extent that B could produce 
and sell a surplus of potatoes and C could pro- 
duce and sell a surplus of mutton, hides, and wool, 
they could respectively provide the other utilities 
for members of their family. To the extent that 
D could make shoes and E clothes in excess of 
those required to provide the flour, mutton, and 
potatoes necessary for their subsistence, they 
would have dollars to their credit which could be 
expended for hides and wool. A surplus above 
that expended for these purposes could be devoted 
to the purchase of flour, mutton, and potatoes for 
the support of a family. There would be an in- 
creasing number of persons as families increased 
in size and new families came into existence. 
Thus there would be an increasing number of per- 
sons who could consume the increasing supplies 
of flour, potatoes, mutton, shoes, and clothing. 

When the demand for utilities of a given kind 
came to be in excess of those an individual could 
produce himself, he could enlist the etforts of an 
employee. The effort put forth by A, B, C, D, 
and E in their respective vocations was an eco- 



PRICES FOR PRODUCTS OF ARTISANS 73 

uomic utility in the sense that it entered into the 
production of the utilities they sold. But it was 
effort put forth by the person who was responsible 
for the sale of that which he produced. The ef- 
forts of an employee are applied to substance for 
the provision of which he is not responsible, and 
in the production of utilities for the sale of which 
he is not responsible. Thus human effort becomes 
an economic utility in somewhat the same sense 
that substance is an economic utility. Therefore 
price has to be determined for human effort, that 
price designated as wage. 

Through long periods the utilities required for 
the subsistence of an individual would not mate- 
rially change. If five sacks of flour, ten bushels 
of potatoes, fifty pounds of mutton, two pairs of 
shoes, and one suit of clothes continued to be the 
smallest measures of these utilities that would 
suffice an individual for one year, the lowest wage 
an employer could pay would be at the rate of 
twenty-five dollars a year. That is, the employee 
could obtain twenty-five dollars a year for mak- 
ing shoes with which he could buy flour, mutton, 
and potatoes. He would at this stage of develop- 
ment have to be self-sufficient in the production 
that met other wants. It is, however, to be re- 
flected that as under our supposition, any one 
could gain subsistence by the individual applica- 
tion of his effort, an employer would probably 
have to pay a higher wage than this. If for an 



74 THE FLOW OF VALUE 

increased volume of utilities produced by the 
combined efforts of himself and his employee, the 
employer could obtain the same prices as before, 
the dollars to his credit would tend continually to 
be in excess of those required in payment for 
subsistence, substance, and wages. Thus his 
profit would consist of the credits received for 
utilities produced by the combined efforts of him- 
self and his employee over his expenditures for 
subsistence, for substance utilized in production, 
and for wages paid for effort enlisted in produc- 
tion. 

In nearly all men is the desire for gain. In or- 
der that the dollars to his credit may increase in 
accelerating ratio, a producer will endeavor to 
produce at a decreasing expense. Shoemaker D, 
through the intelligent coordination of the efforts 
of himself and his employee, would find that the 
expense of producing each pair was less than if 
they worked separately. That is, a greater num- 
ber of shoes could be produced in relation to the 
effort expended in production, a greater number 
of shoes could be produced in relation to the flour, 
mutton, and potatoes required to maintain the 
vitality from which emanated the effort applied in 
production. If the demand so increased that he 
could utilize the effort of additional employees, 
he might the further specialize their application. 
He might have one prepare soles, another uppers, 
and another put them together. By such effective 



PRICES FOR PRODUCTS OF ARTISANS 75 

specialization and coordination he could produce 
a still greater volume of shoes in relation to the 
etfort expended. If he continued to obtain the 
same prices, his credits would the further increase. 

When D bought hides from C, he would convert 
them into leather himself and later might have 
certain of his employees convert them into leather. 
In time he would discover that a man specializing 
in the conversion of hides into leather could effect 
such economy in its production that by availing 
of his efforts he could make a still larger number 
of shoes with the efforts of the same number of 
men. Thus evolves the tanner. Or he may 
evolve through the enterprise of one who perceives 
that by specializing in the conversion of hides into 
leather he can produce leather so advantageously 
that he can sell it to the shoemaker for less than 
the shoemaker can produce it. The specialized 
tanner may come to produce leather sufficient for 
the requirements of a number of shoemakers. 
He will become better acquainted with the sources 
whence hides can be obtained than the separate 
shoemakers and will be able to purchase them in 
larger quantity. As the demand for leather in- 
creases, he can increase his production by employ- 
ing wage-earners, and reduce his cost of produc- 
ing leather by specializing and coordinating their 
effort. 

In aur supposititious case of the purchase of 



76 THE FLOW OF VALUE 

hides by D from C, the conditions determined that 
the price could not be in excess of nine cents a 
pound. It may be that D's cost of converting 
hides into leather by means of the efforts of his 
own employees was three cents a pound. He 
might be willing to pay the tanner twelve cents a 
pound for leather in order that his employees 
might concentrate their efforts upon making shoes, 
but he would not pay more than this. He would 
endeavor to pay less and through bargaining 
would doubtless share in the benefit of the tan- 
ner's lower cost of production. As there came to 
be several tanners purchasing hides from several 
farmers and selling leather to several shoemakers, 
there would be competition between the farmers 
to sell their hides, competition between the tan- 
ners to purchase their hides, competition between 
the tanners to sell their leather, and competition 
between the shoemakers to purchase their leather. 
The quantity of leather that could be made at a 
given time would depend upon the hides available 
at that time. The demand for leather would be 
determined by the demand for shoes, the demand 
for hides would be determined by the demand for 
leather. The prices for hides, for leather, and 
for shoes would be determined by this interela- 
tion between supply and demand. 

Through such division and subdivision of the 
functions of production is the further advanced 
that specialization by means of which a given 



PRICES FOR PRODUCTS OF ARTISANS 77 

quantity of utilities can be produced by a smaller 
number of persons, thus at less expense, and, other 
things equal, with increasing credit to the pro- 
ducer. Therefore the tendency will be toward 
such division and subdivision of effort in the pro- 
duction of utilities of all kinds. 

Such division and subdivision gives rise to an 
increasing diversity of accounts in our suppositi- 
tious record. For example, with the evolution of 
the shoemaker, there would come to be entries to 
his credit as he sold shoes, entries to his debit as 
he bought flour, potatoes, and mutton of A, B, and 
C, clothes of E, and corresponding entries to their 
credit. As he came to buy hides of C there would 
be entry of credit to C for hides sold, and to the 
debit of T> for hides purchased. As the tanner 
evolved there would be entries to the credit of C 
for hides sold, to the debit of the tanner for hides 
purchased, to the credit of the tanner for leather 
sold, and to the debit of D for hides purchased. 
There would be entries to the credit of A, B, and C 
as the tanner purchased flour, potatoes, or mutton 
from them, but there would not be entries to their 
debit for the purchase of leather. The entries to 
the debit of D as he bought leather from the tan- 
ner would be offset by entries to the debit of 
A, B, and C as they purchased shoes. 

An increase in the population necessitates an 
increase in the volumes of the essential utilities. 



78 THE FLOW OF VALUE 

If the increased volumes were respectively pro- 
duced by the same proportions of the population, 
and the increase in production were in proportion 
to the increase in the population, their prices 
would not materially change. That is, for exam- 
ple, so long as there continued to be essential to 
the annual support of an individual five sacks of 
flour, ten bushels of potatoes, fifty pounds of mut- 
ton, two pairs of shoes, and one suit of clothes, 
these utilities, in these proportions, would have 
to be produced for each person whose existence 
was maintained. The effort the least efficient per- 
son put forth would have to pay for these utilities, 
and these utilities would have to be forthcoming 
in return for that effort. Thus the effort which 
resulted in the production of these utilities in the 
volumes that passed to the least efficient would 
be offset by the efforts of the least efficient. The 
price of the total of their efforts would be the price 
of the total of these utilities which they have re- 
ceived in return for their efforts. The more effi- 
cient would receive credits enabling them to buy 
these utilities in greater measure, but so long as 
these were the only final utilities, debits and cred- 
its would be derived solely in connection with the 
processes of their production and sale. 

For example, when the population so increased 
that shoemaker D was obliged to enlist the efforts 
of an employee, D would obtain additional credits 
from the sale of shoes. The efforts of the em- 



PRICES FOR PRODUCTS OF ARTISANS 79 

ployee would be an economic utility, but the em- 
ployee could not expend the credits received as 
wage except for such utilities as were then pro- 
duced. When hides became an economic utility 
and were used only in the making of shoes, the 
shoemaker would be the only purchaser. The 
seller of hides could expend the credits obtained 
therefrom only for such other utilities as were 
then produced. As D obtained customers for all 
the shoes he and his employee could make, he 
would have credits more than sufficient to provide 
utilities such as were then produced in quantities 
sufficient for his family, and pay wages to his 
employee. When his credits increased to an 
amount in excess of that required to pay wages 
and for substance; that is, when the dollars ob- 
tained for the results of efforts put forth in pro- 
duction for which he was responsible exceeded the 
dollars expended in that production, he would re- 
ceive profit in the commercial sense. This consists 
in a surplus of the credits received for utilities 
over the debits incurred in their production, and 
thus does not take into account the personal ex- 
penditures of the recipient. It may or may not be 
sufficient to meet these personal expenditures even 
if they are for no more than subsistence. Or it 
may be sufficient to allow him to increase his per- 
sonal expenditures and to invest a portion in 
further production. 
As A, B, and C similarly produced larger vol- 



80 THE FLOW OF VALUE 

umes of flour, potatoes, mutton, hides, and wool 
in relation to the effort expended, credits would 
accrue to them in excess of their debits so long 
as these utilities were produced in the same pro- 
portions in relation to the demand of an increas- 
ing population. Thus there would come to be 
credits to A, B, and C as well as to D and E that 
would not only enable them to pay their expenses 
of production but to buy more of the final utilities 
then produced than they could use. As utilities of 
the kinds then bought and sold came to be pro- 
duced by the efforts of a decreasing proportion of 
the population, there would be an increasing pro- 
portion whose efforts would not be needed in pro- 
duction so long as it was of only these utilities. 
A, B, C, D and E could retain their surplus cred- 
its until they desired to expend them for the pur- 
chase of utilities of these kinds, but if they con- 
tinued in similarly efficient production their cred- 
its would continue to increase. Therefore the 
only use that could be made of them would be 
to provide other persons with such utilities. Un- 
less this provision were through charity, they 
would desire from those supplied the results of 
their efforts in return. But they would not desire 
the results of the efforts of these other persons 
unless in the form of utilities of other kinds than 
those with which they were supplied. Thus A, 
B, C, D and E could employ men in the production 
of utilities of kinds not theretofore produced for 



PRICES FOR PRODUCTS OF ARTISANS 81 

sale. There would come to be carpenters, smiths, 
and other artisans. The ratio to the dollar, that 
is, the prices of the utilities produced by them, 
would tend to be determined in the same manner 
as the prices of shoes and clothing ; and the prices 
of substance used by them in the same manner as 
the prices of hides and wool. 

The purchase of utilities produced by others 
would be equivalent to employing others in their 
production. Instead of wages being paid directly 
there would be the transferring of credits to those 
responsible for their production. The perception 
of opportunities would lead many who believed 
they could obtain profit to specialize in other kinds 
of production. Thus there would be produced 
additional utilities not only by the smith and the 
carpenter but by other specialized workers. Thus 
there would be an increase in the demand for the 
utilities theretofore produced because of the de- 
mand from those whose efforts were enlisted in 
production of the additional utilities. 

The attainment of profit in the production of 
the underlying essential utilities would tend to 
lead others than A, B, C, D, and E to engage in 
their production. For example, an* employee, per- 
ceiving that shoemaker D was obtaining profit, 
might demand a higher wage. D might be will- 
ing to advance his wage rather than lose his serv- 
ices. With increasing credits, the employee would 



82 THE FLOW OF VALUE 

be enabled to purchase more than the underlying 
utilities essential to his existence. He might un- 
dertake to support a family. 

It might be that this employee would not be sat- 
isfied with the highest wages he could obtain from 
D and would engage in making shoes for custom- 
ers himself. If the increasing demand could not 
be met by D and his employees, it might suffice 
to provide customers for the new enterpriser. 
If the increasing supply of shoes were not in dis- 
proportionate relation to the increase in the popu- 
lation, and to the increase in the supply of other 
utilities, D and his competitor might be able to 
obtain the same prices as theretofore for all of 
the shoes they could make. The increase in de- 
mand might be due not only to an increasing popu- 
lation but in part to the fact that many families, 
because of their increasing credits, would wear 
more shoes. In the same way there would come 
to be similar organizations composed of employer 
and employees engaged in the production of util- 
ities of increasing variety. The essential utilities 
would have to be produced for all of the popula- 
tion, and their prices could not be less than would 
provide subsistence for the least efficient employed 
in production. Other utilities could not be pur- 
chased by the least efficient. Their volume would 
be limited by the demand of those whose credits 
were more than sufficient for subsistence. Tlie 
price of such another utility would have to be at 



PEICES FOR PRODUCTS OF ARTISANS 83 

least sufficient to enable its production to be con- 
tinued. It might be as much more as purchasers 
were willing to pay. The tendency would be for 
that number of persons to be engaged in its pro- 
duction to whom purchasers were willing to pay 
the prices that would enable the least efficient of 
that number to continue in the production. At 
lower prices, other things equal, the least efficient 
would be driven out of that production : the least 
efficient remaining would be more efficient than 
those driven out. At higher prices, other things 
equal, a greater number would be drawn into the 
production until the volume were in excess of 
that which would bring prices that would support 
the least efficient of this number. 

The least efficient receive no more than they con- 
sume and consume all they receive. Their gain 
is in making the living which they could not other- 
wise obtain. The more efficient, those whose ef- 
forts contribute in greater measure to the produc- 
tion of utilities, receive credits that entitle them 
to more than is essential to their existence. Thus 
they may have a surplus of credits over their ex- 
penditure for what they consume. 

This chapter has outlined the evolution of the 
artisan, the worker for wage, and the producer of 
substance for transformation. Wage is paid by 
the employer to an employee for putting forth his 
effort under the direction of the employer, who is 
responsible for its application and the results. 



VII 



A HYPOTHETICAL DEVELOPMENT OF PEICES FOE SOUECES 
OF SUBSTANCE AND INSTEUMENTS OF PEODUCTION 

Sources of Substance 

As meat, hides, and wool came to have price, the 
animals growing meat, hides, and wool would be 
bought and sold because of the prices that could 
be obtained for their yield. Thus such animals 
would become economic utilities ; they would have 
a ratio to the dollar. The price of an animal 
obviously would have to be less than that of its 
yield, at least as much less as the cost of obtaining 
it from the animal. The price of hides and wool 
would likewise have to be less than that of the 
intermediate utilities, such as leather and cloth, 
into which they were transformed, and the prices 
of these intermediate utilities less than those of 
the final utilities into which they were ultimately 
transformed. 

For example, if the price he could obtain for 
leather enabled the tanner to pay nine cents a 
pound for hides and the yield of an animal were 
twenty pounds of hides, its price, if there were 
no other consideration, would have to be less than 
one dollar and eighty cents. If that animal also 

84 



PRICES FOR SOURCES OF SUBSTANCE 85 

yielded fifty pounds of meat for which could be 
obtained ten cents a pound, its price would have 
to be less than six dollars and eighty cents in 
order that the purchaser might prepare the meat 
and the hides, and derive gain from their sale. 
The farmers who raised such animals might con- 
vert them into meat and hides themselves, or 
might sell them to butchers. Or one farmer might 
buy them from another because of the prices ob- 
tainable for their yield of substance, or for the 
purpose of breeding animals which would yield 
such substance. Or an animal yielding substance 
with a degree of continuity, such as a sheep yield- 
ing wool, a cow yielding milk, a fowl yielding eggs, 
might be bought and sold because of the belief that 
the prices obtainable for its continuing yield would 
exceed the debits incurred for its purchase and 
for the subsistence requisite to the production of 
its yield. 

The number of farmers who would raise such 
animals would be limited by the least efficient, by 
him whose animals yielded only sufficient to en- 
able him to continue in their production. The 
more efficient farmers, those whose animals were 
of greater yield in proportion to the effort ex- 
pended upon them, would, other things equal, ob- 
tain profit. Such efficiency might be due to the 
intelligence and industry applied in breeding and 
nurturing the live stock or, in part, to the fertility 
of the soil from which were obtained the crops 



I 

86 THE FLOW OF VALUE ^ 

with which it was fed. And so also with the rais- 
ing of grain. The efficient farmers, those pro- 
ducing the largest crops in relation to the effort 
expended, would obtain the highest profit. This 
might be due to their intelligence and industry in 
cultivating, sowing, and reaping, but the fertility 
of the soil and accessibility to the markets for 
its products would be a factor in their obtaining 
profit. 

Therefore, it would be that as land was utiliz- 
able in producing more than necessary for the 
subsistence of its cultivators, there might be those 
willing to buy such land because of the profit 
obtainable through its utilization. Thus such land 
would become an economic utility; a measure of 
such land would command price. There also 
might be those willing to pay part of the return 
derived from the cultivation of such land in order 
that they might have the right to use or dispose 
of the remainder of that return. Thus there 
would evolve the rent of land. Land would be 
bought or would be rented because it was a source 
of substance from which profit could be obtained. 
Moreover, sources of substance of potential prof- 
itable utilization might be bought and sold. Sel- 
dom, if ever, however, would they command rent, 
because rent for land utilized in production is ordi- 
narily paid froni the return received through that 
utilization. 

The price of land utilized as source of substance 



PRICES FOR SOURCES OF SUBSTANCE 87 

depends upon the price which can be obtained for 
the substance it yields, and the price of that sub- 
stance depends in turn upon the prices which 
can be obtained for the utilities into which it is 
transformed. Thus not only does farming land 
come to bear a ratio to the dollar, but reaches of 
timber and beds of minerals also to have price. 
They may be sold separately from the soil, or the 
rights to the utilization of timber or of underlying 
minerals may be disposed of by lease providing 
for payment as timber is cut or minerals extracted. 
A given area of land may be utilized simulta- 
neously in the production of foodstuffs, clothing 
stuffs, woods, and minerals. Other things equal, 
a source of substance which will produce the great- 
est yield in relation to the effort applied is that 
which will command the highest price or the high- 
est rent. 

Instruments of Production 

As the force applied by a machine accomplishes 
much that previously was effected by the direct 
application of human effort, the machine, to use 
a common phrase, displaces labor. It would be 
more accurate to say that it enhances the produc- 
tivity of labor. By the use of a machine a man 
can produce larger volumes of utilities of many 
kinds than with his unaided effort, and he gives 
form to many utilities that could not be produced 
by his unaided effort. The machine evolved from 



88 THE FLOW OF VALUE 

the hand-tool. An animal that pulls or carries 
at the will of man is a tool, in a sense, but the 
term properly designates an instrument that has 
been given form by human effort. By scratch- 
ing the earth with a stick and placing seed in the 
exposed soil, primitive man increased the growth 
of grain. With a stone edge or a metal blade at- 
tached to the stick, he could scratch more earth 
in which he could plant more seed and thus the 
further increase the volume of grain. When he 
progressed to the fashioning and use of the hand 
plow and the animal-driven plow, there was a yet 
greater increase in the volume of production in 
relation to the human effort applied. Production 
such as that of A, B, C, D, and E would have 
been impossible without tools, but tools then fash- 
ioned were of the kinds that facilitated the work 
of the hand such as had been used for centuries. 

Structures, machines, and appliances do not en- 
ter into the flow of utilities in the same manner as 
substance and the utilities into which it is trans- 
formed. Whether property in a machine be in 
one person or another, its use is throughout a 
shorter or longer period. It is an economic util- 
ity in that it may be bought and sold, but its func- 
tion is that of an instrument of production. The 
construction of engines, of machines, and the 
structures in which they were used meant the de- 
velopment of property of a kind that had not 
theretofore entered into man's cognizance. Prop- 



PRICES FOR SOURCES OF SUBSTANCE 89 

erty in tools, even in the hand-loom and the spin- 
ning-wheel, was regarded much the same as prop- 
erty in tables and chairs. There was little if any 
realization that the credits obtained from the sale 
of utilities produced by means of them were in 
any part due to return upon the cost of the tools. 
Even those who used horses and wagons in con- 
veyance for others made little if any distinction 
between the expenditure for these instruments 
directly utilized in production and expenditure for 
food and clothing. 

In the processes of constructing instruments of 
production is requisite the application of effort 
for which must be paid wages at least as high as 
could be obtained for its application in other ways. 
Likewise to those who applied their efforts in pro- 
ducing woods or metals would have to be paid as 
much for producing these substances for trans- 
formation into machines as for transformation 
into other utilities. It would be from the credits 
obtained from the sale of utilities produced by 
hand that would be received the debits requisite 
for the construction of the first machines. In the 
last stage of the construction of a present-day ma- 
chine are applied the efforts of those who put 
together the parts of which it is constituted. Each 
of these parts is composed of substance that has 
undergone various stages of transformation. 
Therefore efforts have been applied by many dif- 
ferent persons in every phase of the construction. 



90 THE FLOW OF VALUE 

In large part these efforts liave been applied in di- 
recting the application of force through other ma- 
chines, that in turn have been formed by the 
efforts of others applied in large measure through 
still other machines. 

To the operation of a machine there are required 
the results of the efforts of others than those who 
have been engaged in its construction and of 
others than those immediately engaged in its oper- 
ation. Whether the power be steam, gas, or elec- 
tricity, there is necessary the combustion of fuel 
to generate that power. Therefore, to its opera- 
tion contribute the efforts of those who have dug 
coal and transported it, of those who have con- 
structed the mines and their equipment, of those 
who have drilled and prepared the oil used as 
lubricant. 

Those responsible for the transformation of 
substance into final utilities will continue to utilize 
a machine in the processes of that transforma- 
tion if the debits incurred for the cost of the ma- 
chine and its operation are less in relation to the 
credits received from the sale of the products than 
would be the relation of debits to credits if the 
products were produced without the aid of ma- 
chines. That which a man can afford to pay for a 
machine is, therefore, determined by the relation 
of its cost and the cost of its operation to its pro- 
ductiveness during the period of its usefulness. 

Unemployment due to the introduction of ma- 



PRICES FOR SOURCES OF SUBSTANCE 91 

chines is temporary. In their construction and 
operation is quickly enlisted specialized effort in 
an extending scale. The displacement of labor is 
the liberation of effort for application in the pro- 
duction of utilities in the increasing volume and 
variety that the extending use of machines makes 
possible. Those who have been trained in spe- 
cialized occupations that are rendered obsolete by 
the introduction of a machine are, however, often- 
times subjected to inconvenience or even privation 
until their effort is readjusted to other applica- 
tion. 

There is the possibility of obtaining profit from 
the utilization of an instrument of production be- 
cause it facilitates that increase in the volume of 
production in relation to the effort applied which 
is characteristic of coordination. Machines, by 
enormously increasing the volume of production, 
enable all persons to obtain utilities in greater 
variety. The instruments of production utilized 
in providing transportation contribute to this end 
by conveying substance and intermediate utilities 
in larger volume than otherwise would be possible 
to places where they are transformed, and by con- 
veying final utilities in larger volume than other- 
wise would be possible to the places where they 
are offered for sale. Warehouses, wholesale 
stores, and retail stores contribute to this end by 
retaining utilities at the place where they are 
wanted until the time when they are wanted. 



92 THE FLOW OF VALUE 

Were it not for such assembling of utilities and 
retaining them until sold, production would have 
to be restricted to the volumes of utilities for 
which there were immediate purchasers. 

Production by means of machines has resulted 
in utilities in volume in excess of that for which 
there is immediate sale, and thus manufacturers 
and merchants are obliged to keep portions of 
them in stock. Thus property is retained not only 
in instruments of production but often for a time 
in the utilities produced. Not only is property 
retained in sources of substance but oftentimes in 
substance itself that awaits market. 



VIII 

A CONTINUATION OF THE HYPOTHETICAL DEVELOP- 
MENT OF PRICES AND PEOFIT 

If all persons were of equal efficiency and the 
same utilities were required to maintain the exist- 
ence of each person, each would contribute to pro- 
duction in the same measure and would receive of 
the utilities produced in the same proportions. 
But, even though the effort of all persons were 
equally effective, there would be required to the 
production of certain utilities the application of 
the effort of a greater number of persons than to 
the production of others, and different utilities 
would be required in different proportions. 
Therefore, it would be necessary to apportion the 
effort applied so that it would result in the pro- 
duction of utilities in the required proportions, 
and it would be necessary to apportion the utilities 
produced to meet the wants of each individual. 

Although in the nature of things it is more than 
improbable that such a community ever existed or 
could exist, let us, for the purpose of tracing the 
relation between the activities that give rise to 
the dollar and the dollar itself, suppose that a com- 
munity consists of one hundred and twenty per- 

93 



94 



THE FLOW OF VALUE 



sons engaged in production and that the essential 
utilities are ^ve in number. Let it be supposed 
that an evolution, such as has been described in the 
preceding chapters, has resulted in the equilib- 
rium between the wants of the community for 
these utilities and the numbers of persons engaged 
in their respective production indicated by the 
following : 

TABLE I 

H^umber 
engaged in 
Production 
24 persons 
32 persons 
36 persons 
18 persons 
10 persons 

60 units 7,200 units 120 persons 







Required 


Utili- 


Required 


for 120 


ties 


per Person 


Persons 


No. 1 


8 units 


960 units 


No. 2 


32 units 


3,840 units 


No. 3 


12 units 


1,440 units 


No. 4 


6 units 


720 units 


No. 5 


2 units 


240 units 



Production 


Total 


per Person 


Produced 


40 units 


960 units 


120 units 


3,840 units 


40 units 


144 units 


40 units 


72 units 


24 units 


240 units 




7,200 units 



The results of the efforts of 
each person must bring him 
60 units of the 5 utilities in 
these proportions: 

Utility No. 1, 8 units 

Utility No. 2, 32 units 

Utility No. 3, 12 units 

Utility No. 4, 6 units 

Utility No. 5, 2 units 



The proportions in which the 
aggregate effort is put forth 
in the respective production 
of particular utilities is as 
follows : 

Utility No. 1, 12 
Utility No. 2, 16 
Utility No. 3, 18 
Utility No. 4, 9 
Utility No. 5, 5 



As the efforts of the respective persons under 
our supposition are of equal effectiveness and, 
therefore, each receives the same utilities in the 
same proportions, the price of the efforts of each 
person, or, as measured by their results, the price 
of the utilities he produces, must be the sixty utili- 



PRICES AND PROFIT 



95 





8 units of No. 


1 


are respectively 


32 units of No. 


2 


equivalent to 


. 12 units of No. 


3 


60 units as 


6 units of No. 


4 


follows : 


2 units of No. 


5 



ties of the five kinds in the requisite proportions. 
Therefore 

40 units of Utility No. 1, or 
120 units of Utility ISo. 2, or 
40 units of Utility No. 3, or. 
40 units of Utility No. 4, or 
24 units of Utility No. 5 

The utilities required by each person are com- 
posed of sixty units in the varied proportions. The 
effort put forth by each person in the production of 
utilities of each respective kind is equivalent to 
that portion of the aggregate effort put forth in the 
production of the sixty units of the five utilities. 
*^Unit'' signifies *^one.'' When *'one'' is a unit 
common to utilities bought and utilities sold, when 
it is the unit by which they are bought and sold, it 
is a unit of price. If, in this supposititious case, 
this unit of price be termed the dollar, each person 
will receive sixty dollars for the utilities he has 
produced and will expend sixty dollars for the 
utilities he requires. Therefore, 

Each person producing 40 units of Utility No. 1 will 

receive $60, or $1.50 per unit. 
Each person producing 120 units of Utility No. 2 will 

receive $60, or $ .50 per unit. 
Each person producing 40 units of Utility No. 3 will 

receive $60, or $1.50 per unit. 
Each person producing 40 units of Utility No. 4 will 

receive $60, or $1.50 per unit. 
Each person producing 24 units of Utility No. 5 will 

receive $60, or $2.50 per unit. 

Each person will obtain the essential utilities 
in the requisite proportions by the following ex- 
penditure : 



96 THE FLOW OF VALUE 

8 units of Utility No. 1 at $1.50 $12.00 

32 units of Utility No. 2 at .50 16.00 

12 units of Utility No. 3 at 1.50 18.00 

6 units of Utility No. 4 at 1.50 9.00 

2 units of Utility No. 5 at 2.50 5.00 

$60.00 

Although this supposition disregards the ele- 
ment of time, it is not to be forgotten that, while 
production, buying, and selling continue from day 
to day, a longer period is required in the produc- 
tion of utilities of one kind than in those of an- 
other, and that utilities of one kind last longer 
than those of another. 

Inasmuch as those who have the capacity and 
the inclination for directing and coordinating the 
efforts of others seek the opportunity for utilizing 
the efforts of others, let us suppose that of the 
supposititious community one of those engaged in 
the production of Utility No. 1 undertook to re- 
lieve his twenty-three colleagues from the neces- 
sity of selling their products, under agreement to 
pay them wages equal to the return they had 
separately obtained. Let us suppose that then, 
through the direction and coordination of their 
efforts, he were enabled to produce 1200 units of 
Utility No. 1 instead of the 960 units theretofore 
produced. He would endeavor to continue to ob- 
tain $1.50 a unit. That is, from the sale of each 
unit of Utility No. 1 he would endeavor to obtain 
the same command over other utilities as was pre- 



PRICES AND PROFIT 97 

viously obtained from the sale of each unit of 
Utility No. 1. If he could do so, he would receive 
from the sale of the 1200 units an aggregate of 
$1800, or $360 more than previously received by 
the individual producers for the 960 units. The 
payment to each of his twenty-three employees of 
the wage of $60 each would enable them to buy 
the same measures of the five utilities as before. 
There would remain $360 to his credit. But what 
would he do with it ? In the first place, how could 
he obtain the price of $1.50 for the 1200 units? 
If the efforts of the remaining ninety-six persons 
continued to be put forth as before, there would 
be for sale neither more nor less of Utilities No. 
2, No. 3, No. 4, and No. 5. There would be no sale 
for the additional 240 units of Utility No. 1. In 
order to sell the 1200 units of Utility No. 1, the 
employer would have to reduce the aggregate 
price to that previously received for the 960 units. 
Instead of receiving $1800 for the 1200 units, he 
would receive $1440, or $1.20 per unit instead of 
$1.50. Each of the members of the community 
would be enabled to buy ten units instead of eight 
as before. The employer would have received 
no more than the satisfaction of providing his 
f ellowmen with ten units instead of eight, of hav- 
ing made a blade and a quarter grow where but 
one grew before. 

Now let us suppose that an able and enterpris- 
ing member of each of the other groups effected a 



98 THE FLOW OF VALUE 

similar combination of resources and coordination 
of effort, which resulted in a similarly increased 
production of Utilities No. 2, No. 3, No. 4, and 
No. 5. Then 24 persons would produce 1200 units 
of Utility No. 1 ; 32 persons, 4800 units of Utility 
No. 2; 36 persons, 1800 units of Utility No. 3; 18 
persons, 900 units of Utility No. 4; and 10 per- 
sons, 300 units of Utility No. 5. If these results 
could have been attained through separate and 
uncoordinated effort, the results of the efforts of 
each person would have enabled him to buy 10 
units of Utility No. 1 instead of 8, 40 units of 
Utility No. 2 instead of 32, 15 units of Utility No. 
3 instead of 12, 7% units of Utility No. 4 instead 
of 6, 2% units of Utility No. 5 instead of 2. In 
this event the price of Utility No. 1 would be $1 .20 
per unit instead of $1.50 ; of Utility No. 2, $.40 in- 
stead of $.50; of Utility No. 3, $1.20 instead of 
$1.50; of Utility No. 4, $1.20 instead of $1.50; of 
Utility No. 5, $2.00 instead of $2.50. 

The increased production, however, was ef- 
fected by the mental effort applied by the em- 
ployers in coordinating the efforts of the em- 
ployees. The employer responsible for the pro- 
duction of utilities also became responsible for 
the prices received for them, and the total derived 
from their sale passed to his credit. He would 
endeavor to obtain the same prices as before. 
That is, he would endeavor that no greater meas- 
ure of the utilities, for the production of which he 



PRICES AND PROFIT 99 

was responsible, would have the ratio of the dollar 
than before. And he would endeavor to obtain 
with the dollar received the greatest measure he 
could of other utilities. 

In order that he might continue in production, 
each employer would have to enlist the requisite 
effort. The relation of effort put forth to wants 
met had established $60 as the price of the utilities 
required for each individual. As each individual 
could have obtained the required utilities for $60 
if he had continued to work for himself, he would 
not work for wage unless he could obtain at least 
as much. Therefore, in order that production 
might continue, each employer would have to pay 
at least $60 as wages to each employee. 

Then the flow of debits and credits and of utili- 
ties would be as follows : At the end of a period 
of production each employer, from the credits de- 
rived frona the sale of utilities produced, would 
pay $60 as wage to each employee. Thus there 
would be a credit to each employee of $60. He 
would pay to the producer of Utility No. 1 $12.00 
for 8 units of that utility. Each employee would 
be debited, and employer No. 1 credited, with 
$12.00. Each employee would be debited with $16 
for 32 units of Utility No. 2, and employer No. 2 
credited with $16. Each employee would be deb- 
ited with $18 as the result of his purchase of 12 
units of Utility No. 3, and employer No. 3 would 
be credited with $18. Likewise there would be 



100 THE FLOW OF VALUE 

debit to each employee for $9, the price of 6 units 
of Utility No. 4, and credit to employer No. 4 for 
$9. And there would be debit to each employee 
for $5, the price of 2 units of Utility No. 5, and 
credit to employer No. 5 in that amount. The 
proportions in which each had expended his cred- 
its would indicate the utilities he wanted and in 
what proportions. The aggregate of credits ac- 
cruing to each employer would enable him to enlist 
the effort requisite to their further production. 
He would not buy of these utilities with his credits 
except for his individual use and consumption. 
He would buy the effort of employees, and trans- 
fer to them, as wages, credits that would enable 
them to buy the utilities. 

At the end of a period of production each em- 
ployer would have utilities exceeding by one quar- 
ter those which had been sold to the various per- 
sons engaged in production. The 120 persons, 
because of the coordination of their efforts, would 
have produced utilities sufficient for the support 
of 150 persons. The surplus utilities would be the 
property of the ^ve employers. They could not 
sell them unless there were persons to buy them. 
Persons could not buy them unless they could pro- 
duce utilities in return. Each employer could em- 
ploy six persons at the wage of sixty dollars a 
year to render service that did not consist in the 
production of utilities for sale to others than him- 



PRICES AND PROFIT 101 

self; that is, in the production of utilities which 
afforded him immediate, personal gratification. 
Thus he could, for example, employ six servants 
to minister to his ease and comfort after the fash- 
ion of the old-time, oriental potentates. In any 
event, there would be utilities for the support of 
an additional thirty persons, which could be paid 
by the five employers separately or jointly. That 
is, there would be $900 that could be so expended. 
There might come to the community a doctor, a 
teacher, and a barber, who would seek to obtain 
as much as they could from the five employers. 
The doctor might be able to obtain $120, the 
teacher $120, and the barber $60. There would 
remain utilities of the ratio of $600 in the posses- 
sion of employers. If each employer and the doc- 
tor and the teacher employed one servant at the 
wage of $60, there would remain utilities of the 
ratio of $180 in the possession of the employers. 

Need would develop for other functionaries. 
The debit and credit entries would have become so 
numerous as perhaps to justify the employment 
of one person to give his exclusive time to their 
adjustment. This would mean wage to him of at 
least $60. 

In the absence of any other arrangement each 
member of the community, when he wanted utili- 
ties of one kind or another, would have to go to 
the place of production and buy them from the 



lOS THE FLOW OF VALUE 

employer. As purchasers would probably buy re- 
spective utilities at different times and in different 
measures, the time of each producer would largely 
be occupied in making sales to his customers. 
There would be a saving of time both to buyers 
and to sellers if there were a storehouse to which 
utilities of all kinds were forwarded after pro- 
duction, and to which any purchaser could resort 
when he wanted utilities of any kind. The sev- 
eral employers, rather than have their effort dis- 
tracted in making sales at retail, could afford to 
join in employing a man or two to serve as inter- 
mediaries between them and their customers. If 
they thus employed two men, the least they could 
pay in wages would be $60 to each. Or a man, 
perceiving the opportunity, might offer to pay the 
producers a somewhat lower price for their wares 
and take the responsibility for their sale, thus be- 
coming an enterpriser himself. He could not 
charge at retail more than the established prices, 
but the employers could afford, because of the sav- 
ing of their time and effort, to make that reduc- 
tion in the price at wholesale which would enable 
the intermediary to sell the utilities at retail. 
Thus would evolve the merchant. This differen- 
tiation in 'the occupations naturally presupposes 
an increase in the population of the community, or 
else the shifting of the efforts of certain of its 
members. This, of course, would have an effect 
upon the volume of production and upon prices. 



PRICES AND PROFIT 103 

Now let it be supposed that the employees en- 
gaged in the production of the different kinds of 
utilities were of different degrees of efficiency. If 
to an employee whose efforts contributed to the 
production of utilities in less degree than that of 
the others his employer were to pay the same 
wage as to them, that employee would be enabled 
to buy utilities in the same proportions as the 
more efficient. An organization with employees, 
some of whom were less efficient than others, would 
not, however, produce the same volume of utilities 
as it would if the efforts of each employee were 
equal to those of the most efficient. Therefore, it 
could not produce utilities sufficient to meet the 
wants of as many persons. At the same prices 
the employer would not receive the same total of 
dollars for the utilities produced. If he were to 
pay the less efficient employees the same wages 
as the others, fewer dollars would remain to his 
credit after the payment of wages. The only way 
he could secure the same profit would be by pay- 
ing the less efficient employees lower wages, or by 
reducing the wages of a number of, or of all of, his 
employees. But rather than accept a reduction, 
the efficient employees would resume the putting 
forth of their effort separately and individually. 
If the less efficient employee did likewise, he could 
not produce utilities in the same volume as the 
more efficient. If he were without the resources 
for individual production, and the employer re- 



104 THE FLOW OF VALUE 

fused to pay him wages disproportionate to the 
results of his effort, he would, other things equal, 
be obliged to work for lower wages than the more 
efl&cient. 

If with an increase in the population of the com- 
munity there were an increasing disparity in the 
efficiency of different persons desiring employ- 
ment, the different ernployers would seek to obtain 
the requisite employees by the payment of the low- 
est wages each would agree to accept. The low- 
est wage any employee would accept would be that 
adequate for the purchase of the utilities neces- 
sary for his subsistence. The relation between 
effort put forth and wants met in our imaginary 
community determined the subsistence wage as 
$60. But in actual communities and with actual 
persons the wage necessary for subsistence is vari- 
able. The highest wage an employer could pay 
the least efficient employee, without reducing the 
wages of others or impairing his profit, would be 
the dollars obtainable, for the utilities produced, 
exceeding the number obtainable in case he did not 
enlist the efforts of that employee. Likewise the 
highest wage he could afford to pay any em- 
ployee, even the most efficient, would be the 
number of dollars obtainable for the utilities 
produced exceeding the dollars obtainable in 
case he did not enlist the efforts of that em- 
ployee. 

If, however, he paid to every employee the high- 



PRICES AND PROFIT 105 

est wage thus determined, all of the dollars re- 
ceived would be paid as wages. By reason of the 
coordination of their efforts, however, the em- 
ployer produces a larger volume than could have 
been produced by the various employees working 
separately. No one of the employees, not even 
the most efficient, working separately could have 
produced utilities for which he would obtain dol- 
lars equal to those his employer would obtain 
through the direction and coordination of his ef- 
forts. The employer's test of the highest wage he 
could afford to pay would not be, therefore, alone 
the dollars he would secure by reason of the ef- 
forts of a particular employee, but the number of 
dollars he would have to pay to enlist effort equiv- 
alent to that put forth by him. Therefore, other 
things equal, he would pay no more to one em- 
ployee than necessary to secure the efforts of 
another of equal efficiency. 

And so also a man, of whatever degree of effec- 
tiveness, will not work for wage, if forihe utilities 
he could produce working separately and individ- 
ually he could obtain more dollars than he could 
obtain as wage. A man will not work for a given 
wage if he can prevail upon his employer to pay a 
higher wage, or if he can obtain a higher wage 
from another employer. A man will not work for 
wage if, through the coordination of the efforts of 
others, he can obtain more as profit than he could 
obtain as wage. 



106 THE FLOW OF VALUE 

In strict commercial significance, profit is the 
amount by which dollars received through the con- 
duct of a business exceed the dollars expended in 
the conduct of that business. That which the em- 
ployer pays for utilities for his individual use and 
consumption comes out of the profit which he de- 
rives from applying his effort in coordinating the 
efforts of others. Therefore, in the following 
table, which shows the changed relations between 
effort put forth and wants met due to the efforts 
of the employers, the surplus of the amounts re- 
ceived by them from the sale of utilities over the 
amounts paid as wage are indicated as profit. 





TABLE II 












Price 


Received 


Paid 


Profit 


util- 


Produced hy 


per 


hy Em- 


as 


of Em- 


ity 


Employer and 


Unit 


ployer 


wages 


ployer 


No. 1 


23 employees — 1,200 units 


$1.50 


$1,800 


$1,380 


$420 


No. 2 


31 employees — 4,800 units 


.50 


2,400 


1,860 


540 


No. 3 


35 employees — 1,800 units 


1.50 


2,700 


2,100 


600 


No. 4 


17 employees — 900 units 


1.50 


1,350 


1,020 


330 


No. 5 


9 employees — 300 units 


2.50 


750 


540 


210 



The status indicated by this table, even if it were 
ever attained, could not continue. It would be 
changed by forces that are always at work, the 
same forces that developed the specialized work- 
man from the germ of specialization in the saving 
of effort in the first exchanges, and then developed 
the employer. Population changes. Different 
persons develop different inclinations and apti- 
tudes, differing degrees of effectiveness, and wants 
in differing proportions. 



PRICES AND PROFIT 107 

Other things equal, it is by means of an increas- 
ing production in relation to the effort expended 
that profit is augmented. Therefore producers, 
animated by the desire for gain, strive to bring 
about a diminution in the ratio of the effort ap- 
plied to the volume produced. The effect of such 
a diminution has been indicated by the transition 
from the status depicted in Table I to that de- 
picted in Table II. A further development would 
be in the differentiation between those who sup- 
plied substance and those who transformed it. 

Let us suppose, by way of example, that to the 
production of 1200 units of Utility No. 1 were 
necessary 1800 units of substance ; that is, one and 
one-half units of substance to one unit of the final 
utility. Let it be supposed that to the production 
of these 1800 units of substance the efforts of eight 
persons were necessary, and that the efforts of 
twelve persons were required to transform this 
substance into 1200 units of final Utility No. 1. 
Thus the efforts of twenty persons would be re- 
quired instead of the efforts of twenty-four to pro- 
duce the 1200 units of Utility No. 1. If there were 
sale for no more than these 1200 units, four per- 
sons would be deprived of employment in their 
production. If the previous price of $1.50 per 
unit could be obtained, these 1200 units would 
bring $1800 to the enterpriser. If he paid wage 
of $60 each to the eight producers of substance 
and to the twelve remaining employes, his outlay 



108 THE FLOW OF VALUE 

for wage would be $1200. He would have $600 as 
profit instead of $420. Or more likely, if he did 
not assume responsibility for paying wages for the 
production of substance but paid producers for 
supplying it, he would endeavor to pay the least he 
could. He would receive for the final utilities 
$1800, of which to his immediate employees he 
would pay as wage $720, leaving $1080 wherefrom 
to pay for substance and obtain profit. 

If the producers of substance put forth their ef- 
forts individually and separately, he would bar- 
gain with them. The utilities necessary to the 
existence of each cost $60. If each producer of 
substance produced 250 units, the lowest price the 
employer could pay would be $.24 a unit. But 
this would allow no more than a living to the pro- 
ducer of substance. If it were timber or coal, he 
would continue to exhaust forest and mine with- 
out more return than he could obtain by working 
for wage. If the substance were foodstuffs from 
the soil, or fiber from plant, or meat, hide, or wool 
from animal, he would have to plant and till and 
harvest, or breed and kill. But there would be 
producers of substance of differing degrees of ef- 
ficiency. The least that any one could produce 
in order to obtain a living would be 250 units. 
Another, by reason of superior industry or better 
wood or coal or more fertile soil, might produce 
400 units of substance, and another 600 units. If 
employer No. 1 could obtain the requisite 1800 



PRICES AND PROFIT 109 

units of substance at $.24 a unit, he would pay no 
more. At this price the producer of 400 units 
would obtain $96, the producer of 600 units, $144. 
Then it would be that if the other 6 producers of 
substance produced 250 units apiece, the 8 pro- 
ducers would produce 2500 units instead of 1800 
as before. 

If employer No. 1 desired no more than 1800 
units, he would pay the lowest price for which he 
could obtain that quantity. In competition with 
the producers of 250 units each, the producers of 
400 units and 600 units would have the advantage. 
They might offer to sell to the employer at the 
lower prices, which would induce him to purchase 
substance from them in preference to the other 
producers. The least possible reduction, other 
things equal, would serve this purpose. If they 
were to sell at $.231/2 a unit, they would dispose of 
their 1000 units for $235. The enterpriser would 
still have to pay $.24 a unit for the remaining 800 
units desired. These he could obtain from three 
of the producers if they could manage to increase 
their supply by as much as fifty units, and the 
three other separate producers would be unable to 
gain a livelihood in the production of substance of 
that kind. 

The producer of the 400 units would receive $94, 
and the producer of the 600 units, $141. The one 
would have $34 as surplus over his subsistence ; the 
other, $81. If their effective productivity was due 



110 THE FLOW OF VALUE 

not so much to industry and capacity as to the 
excellence of soil or timber or coal, there might be 
those who would pay for the right to utilize farm, 
forest, or mine. 

As the population increased and the specializa- 
tion of effort extended, the tendency would be, 
other things equal, for the employers to obtain 
larger profit. This would be because, as utilities 
were produced with diminishing effort, there 
would be fewer persons to be supported in the 
production of any given utility. Therefore, those 
of the capacity and inclination would not only en- 
gage in the production of new utilities but in pro- 
duction in lines in which they perceived an em- 
ployer was obtaining profit. Such a one might so 
engage in production with the intent of obtaining 
profit because of the increasing demand due to an 
increasing population, or with the intent to share 
the profit of an established employer, or both. 

Let it be supposed that an employee, or another, 
perceiving that employer No. 1 was obtaining 
profit, became employer No. la in the production 
of Utility No. 1. He would purchase substance 
from its producers. The producers not having 
customers would be the producers of 250 units 
each which employer No. 1 did not buy. Employer 
No. la would have to pay them at least $.24 a unit. 
He could not obtain more than 750 units, unless he 
CQuld outbid employer No. 1 for a portion of the 



PRICES AND PROFIT 111 

output of the other producers of substance. He 
might o:ffer the producers of 400 units and 600 
units $.24: employer No. 1 might offer $.24^, and 
then employer No. la, $.25. The highest price 
either could continue to pay would be that which 
did not extinguish his profit. The fact that the 
producers of the larger quantities of substance ob- 
tained profit would stimulate the less efficient to 
increase their production, or would induce others 
to enter upon this production. Then there would 
come to be competition between the producers of 
substance for its sale, and between the employers 
for its purchase. As the supply was high in rela- 
tion to demand, greater measures could be ob- 
tained for the dollar ; that is, its price would dimin- 
ish. As the demand was high in relation to the 
supply, smaller measures could be obtained for 
the dollar — that is, its price would advance. The 
lowest price that could be paid would be that which 
would enlist the number of persons whose efforts 
were required in the production. This number 
would be limited by those whose efforts were just 
sufficient to produce the supply for which, at the 
prices obtainable, they could gain subsistence. 
Those producing larger quantities would at this 
price, other things equal, obtain profit. It might 
be that an employer would engage in the produc- 
tion of this substance. The separate producers 
might be willing to rent to him or sell to him the 
sources from which they derived substance at a 



112 THE FLOW OF VALUE 

rental equivalent to the profit they had attained 
from the production themselves. By the payment 
of wages and the coordination of effort, the em- 
ployer might so increase the volume of production 
that he could, at the price obtainable, pay the 
rental, pay wages, and yet derive profit. 

As there are always differences in the capacity 
of different persons, there would be, even in a low 
stage of development, differences in the credits 
accruing to different persons. So long as the least 
efficient were in such number that they would be 
compelled to work for subsistence, the lowest wage 
would continue to be the price of the underlying 
essential utilities in their crudest and simplest 
forms. As there was the production of utilities 
in greater volume in relation to the effort ex- 
pended, these underlying essential utilities would 
tend to be produced by the number limited to those 
whose efforts were required to supply them in 
volume for which there was demand; that is, in 
the volume in return for which the least efficient 
would receive at least the utilities necessary to 
their subsistence. 

In each of the various kinds of production would 
be engaged the less effective and the more effec- 
tive. The credits accruing to the least effective 
would enable them to purchase only the underlying 
essential utilities, but the credits accruing to the 
more effective would enable them to purchase 
other utilities. Thus there would come to be utili- 



PRICES AND PROFIT 113 

ties of other kinds with ratio to the dollar. But 
such a utility could be purchased only by those 
with credits in excess of subsistence. Of their 
excess credits, some may make expenditure for 
such a particular utility and others may not. As 
credits pass to their producers in excess of their 
debits, they will be enabled to purchase other utili- 
ties. As credits remain in the possession of vari- 
ous persons, they will be enabled to purchase other 
utilities. 



IX 



THE EFFECT OP THE INTRODUCTION AND USE OF 
MACHINES UPON PEICES AND PROFIT 

Let US continue the hypothetical development 
by tracing from the status indicated in Table II 
the modification in the flow of credits and debits 
that would be caused by the introduction of ma- 
chines. Let us suppose that employer No. 3 in- 
vented a machine by means of which ten employees 
could produce 3600 units of utility No. 3, and that 
to the construction of this machine were requisite 
the efforts of ten employees. With his profit 
of $600 he could pay for the construction of 
the machine. When it was placed in opera- 
tion, he would need only ten employees to 
produce double the volume of utilities his organ- 
ization had previously produced. He would dis- 
pense with the services of twenty-five employees 
and endeavor to find a market for the 3600 utility- 
units that could be produced by running his ma- 
chine to its full capacity. Twelve units of Utility 
No. 3 had sufficed for each person. But perhaps 
each person would use more if they were within 
his means. If each of the remaining ninety wage- 

114 



USE OF MACHINES 115 

earners wanted twenty-four units instead of 
twelve, there would be an immediate market for 
2160 units, but no wage-earner could afford to pay 
more for the twenty-four units than the eighteen 
dollars he had previously paid for twelve, unless 
there were a change in the prices of the other utili- 
ties. If he paid eighteen dollars for twenty-four 
units instead of twelve, the price would be seventy- 
five cents per unit. This would yield the producer 
$1720. In their production he would have to pay 
as wage $600. Therefore, the expenditure for ef- 
fort enlisted in the direct operation of the machine 
and its repair would be $660. If he had to pay for 
substance, coal, and lubricants at the rate of 
twenty cents per unit, the expenditure for these 
items would be $440. Of the $1720 derived from 
the sale of the 2160 units, he would obtain as profit 
$620, which would be only $20 more than the profit 
obtained before the introduction of the machine. 
But by operating the machine to its full capacity, 
he could produce with the same number of em- 
ployees 3600 units at an additional expense for 
substance and other materials of $280. Whatever 
he could obtain for these additional 1440 units in 
excess of the expense of twenty cents per unit 
would add to his profit. If he were to sell them 
at fifty cents a unit, his credits would be increased 
by $720 and his profit by $432, making a total 
profit of $1052. 

Therefore, if the employer could sell these addi- 



116 THE FLOW OF VALUE 

tional units at fifty cents, he would obtain the addi- 
tional profit of $432. If, however, the purchasers 
of the 2160 units were to find out that he had done 
so and complain because of discrimination, the 
reply might be that if he had reduced the price of 
all the 3600 units to fifty cents, he would obtain 
$1800 which would leave as profit only $420, or less 
than the profit he had obtained before the machine 
was introduced. In this case, he would prefer to 
continue to produce only the 2160 units which, if 
sold at seventy-five cents, one-half the price pre- 
vailing before the introduction of the machine, 
would yield greater profit than the production of 
3600 utilities if they were sold for fifty cents. 

The introduction of the machine deprived 
twenty-five wage-earners of employment. Let us 
suppose that one of these was successful in in- 
venting a machine of similar capacity so that, with 
an expenditure of $1380, he also could produce 
3600 units of Utility No. 3. If both employers ran 
their machines at full capacity they could produce 
7200 units of Utility No. 3. Their respective costs 
of production would be 38% cents per unit. Bar- 
gaining conceivably might drive the price as low 
as forty cents, which would leave each enterpriser 
but sixty dollars as profit, no more than the wage 
paid each employee. There could not be sold 7200 
units of the utility unless there were a vast in- 
crease in the demand. This would mean not only 
an increase in the population, but probably a de- 



USE OF MACHINES 117 

mand increasing in still greater ratio. So long as 
the lowest wage were sixty dollars, if the demand 
of each person for the utilities and the prices of 
them remained the same, each person would have 
eighteen dollars which he could expend for Utility 
No. 3. At forty cents each, he could buy forty-five 
units. If these were in excess of any possible 
wants of each person, if, for example, the demand 
of every person for himself and his family aver- 
aged thirty units, there would be an overproduc- 
tion of fifteen units per person. 

Now let us suppose that machines are invented 
and placed in operation in the production of the 
other utilities. The volume of each is greatly in- 
creased, both in relation to the number of persons 
engaged in its production and to the population. 
The fact that the volume is increased in relation to 
the number of persons engaged in its production 
means that its price can be reduced. That is, as a 
smaller number of persons have to be supported 
in the production of each utility, fewer of other 
utilities are needed to support those engaged in 
the production of each utility. The fact that the 
production of a utility has increased in volume in 
relation to the population not only means that its 
price can be reduced but that its price must be 
reduced if the increased volume is to be sold. The 
increased volume will not be sold unless the utility 
is wanted by members of the population who have 
not been accustomed to buy it, and unless their 



118 THE FLOW OF VALUE 

command over utilities is so increased that they 
can buy it. 

An individual, responsible for the application of 
his effort and for the sale of the utilities he pro- 
duces, can, other things equal, produce the largest 
volume of which he is capable by working continu- 
ously to the limit of his capacity. An employer 
responsible for the application of the efforts of 
himself and his employees can produce the largest 
volume of which their efforts are capable if these 
efforts are continuously applied to the limit of 
their capacity. Continuous application to the 
limit of capacity implies intervals of rest and rec- 
reation which will enable continuous maximum 
exertion. It differs from the extraordinary ex- 
ertion which, although it may result in extraor- 
dinary effect, is followed by harmful reaction and, 
therefore, can only be spasmodic. 

An employer having property in machines, pay- 
ing for substance, and paying wages can produce 
the largest volume of utilities through the con- 
tinuous working of his organization to the limit of 
its capacity. His employees will work to better 
advantage by having continuous employment, and 
so also will those engaged in the production of the 
substance which he buys. Moreover, it is nearly 
always the case that the effectiveness of the appli- 
cation of cosmic force by means of machinery in- 
creases in greater ratio than the number of those 



USE OF MACHINES 119 

whose efforts are applied in its application. That 
is, for example, machines can usually be operated 
to their full capacity with less than twice the num- 
ber of employees that would be requisite to their 
operation to half capacity. Therefore, other 
things equal, an employer will endeavor that his 
organization work as nearly to its full capacity as 
may be possible. If he is prudent he will allow 
his employees intervals adequate for rest and rec- 
reation, and not overwork his machines. Other 
things equal, he will keep his organization thus at 
work if he can obtain profit greater than would 
accrue from the production of a smaller volume — 
a volume that would result from working to the 
limit of capacity part of the time or working to less 
than capacity all of the time. 

Inasmuch as an instrument of production may 
be utilized from the time it is installed until it is 
worn out, destroyed, or discarded, it may be a 
factor in the production of utilities throughout 
that period. "When such an instrument has been 
constructed it is paid for by him to whom property 
in it passes. He may continue to have property in 
it during the period of its usefulness, or he may 
transfer his property in it at one or another time 
during that period. 

The purchaser of such an instrument is obliged 
to make payment for all of the force that has been 
applied in its production. Payment for the effort 



120 THE FLOW OF VALUE 

applied at each stage of production, and for the 
resultant product, has been at the prices deter- 
mined by the various interrelations and inter- 
workings of supply and demand. If the producer 
of such an instrument were to sell it at a price 
equivalent to the debits incurred in its production, 
he would, other things equal, be enabled to produce 
another such instrument, but he would obtain no 
profit from doing so. Therefore, he would not 
continue in that production if he could obtain 
profit by applying his effort and resources in other 
ways. 

The producer of an instrument of production 
would, however, endeavor to obtain for it the high- 
est price he could. If there were two or more pro- 
ducers of instruments of a given kind, a purchaser 
would pay no more for one of them than the low- 
est price at which he could obtain it from any pro- 
ducer. Competition conceivably might force its 
price to the lowest which the least efficient pro- 
ducer would accept rather than not produce the 
instrument, or rather than not sell it if it were pro- 
duced and in stock. If an instrument could be ob- 
tained from only one producer, or if the producers 
were protected in its construction and sale by pat- 
ents, its cost of production might be a compara- 
tively unimportant factor in the price that could 
be obtained. 

The highest price a purchaser would pay would 
depend upon the addition to his profit he believed 



USE OF MACHINES 121 

would be obtainable by means of its utilization. 
If the instrument were a new invention that dem- 
onstrably would so enhance the application of 
human effort that there would be a large increase 
in the volume of utilities produced in relation to 
the number of persons engaged, he would have to 
estimate the prices obtainable for the increased 
volume and the proportions of the total credits 
secured at these prices that would accrue as profit. 
If the instrument were of a kind the efficiency 
of which had been established through experience, 
the purchaser's calculation might not be so much 
concerned with the effect upon his immediate 
profit as with the effect upon his continuing profit. 
The cost of the machine would have to be appor- 
tioned through the costs of production of the total 
volume of utilities, in the production of which it 
was a factor, from the time of its installation until 
the termination of its usefulness. If it were an 
instrument utilized in the production of a utility 
for which there were general and continuing de- 
mand, its period of usefulness might terminate 
only when it was worn out. This period would be 
longer or shorter in accordance with the intensity 
of its operation and the feasibility with which it 
could be repaired and renewed ; the cost of repairs 
and renewals would also have to be apportioned 
throughout the period of its utilization. The pe- 
riod of usefulness might be terminated by the in- 
vention, construction, and utilization of another 



122 THE FLOW OF VALUE 

machine by means of which the same or a greater 
volume of utilities could be produced with the ap- 
plication of still less of human effort. If the pro- 
ducer of utilities by means of the machine was to 
secure the latter machine and substitute it for the 
old, further complications would arise in adjust- 
ing his costs. If an instrument were available 
only in the production of a utility of passing de- 
mand, such as a puzzle or the implements for a 
game of transitory vogue or an article of apparel 
of fleeting fashion, there might have to be the con- 
fidence in the attainment of high profit per unit of 
utility produced to justify its purchase. 

The price of an instrument of production at one 
or another time during its period of usefulness 
would be determined by similar considerations. 
Other things equal, a purchaser would not pay as 
much for a machine that through use had suffered 
deterioration as for a new one ; though perhaps he 
would be willing to pay more for a machine that 
had demonstrated its efficiency than for one new 
and untried. In any event, the seller would en- 
deavor to obtain as much as he could, and the 
buyer to pay as little. What he could pay would 
be determined by his calculation of the effect upon 
his profit that would result from his buying or not 
buying the machine. 

If at any time the volume of utilities produced 
by means of the instruments of a given kind so 
exceeded the demand for those utilities that the 



USE OF MACHINES 123 

aggregate of credits obtained from their sale did 
not meet the cost of production, there would have 
been not only an overproduction but an over- 
utilization of such instruments. Those of the 
least efficient producers, other things equal, would 
be forced into idleness, which would have to con- 
tinue until the demand for the utilities had so in- 
creased that they again could be operated with 
profit. 

Such instruments of production as tools, ma- 
chines, and appliances usually can be installed and 
operated at one place or another place with equal 
effectiveness in so far as their immediate opera- 
tion is concerned, or can be transferred from one 
place to another. The cost of installation will 
vary, other things equal, with the cost of trans- 
portation from the place of production to the place 
of installation. 

Instruments of production such as the struc- 
tures in which and in connection with which ma- 
chines are operated, can in many cases be erected 
at one place or another place, but cannot readily 
be moved. Were there no consideration of loca- 
tion, the factors that determine the price of a 
structure would be the same as those that deter- 
mine the price of a machine or an appliance. The 
place where substance is transformed may, how- 
ever, have an important and even a controlling 
influence upon profit. Certain processes of trans- 
formation may the more advantageously be con- 



IM THE FLOW OF VALUE 

ducted near the sources of substance. If diverse 
substances are utilized, they may the more advan- 
tageously be conducted near the source of one 
substance, or near the source of another, or per- 
haps at a place more or less approximating an 
equal distance from both. Or it may be that 
greater profit will accrue if transformation be 
effected at a place nearer the market for the utili- 
ties produced, even though it be more remote from 
the sources of substance. The choice will be de- 
termined by the effect upon profit of the various 
elements that would enter into the cost of produc- 
tion at one place or another, and the cost of mar- 
keting from one place or another. 

The structure in which a machine is operated, 
or in connection with which any of the processes 
of production are effected, must be erected upon 
land. Structures, the machines and appliances 
utilized in connection with them, and the land upon 
which the structures are erected are designated a 
** plant.'' This, perhaps, is because they are at- 
tached to the ground as is a plant, and also, per- 
haps, because they bear somewhat of the relation 
to the utilities they produce as does a plant to the 
fruit it yields. 

A factor in the cost of a plant is the cost of the 
land. Land may be a source of substance of per- 
ennial yield, as a farm, a ranch, a plantation, a 
truck garden ; or it may be a source of substance 



USE OF MACHINES 125 

not replaced when taken from it, as a mine or a 
forest; or it may form part of an instrument of 
production, that is, of a plant, as when it is the site 
of a manufacturing establishment, or of a ware- 
house, or of a retail store, or the right of way of a 
railroad company; or it may be a final essential 
utility, as when it is the site of a building that 
affords shelter; or it may be a final utility minis- 
tering to the comfort and gratification of the 
owner, as lawn or woodland surrounding a resi- 
dence. Or it may serve two or more of these pur- 
poses, as when part of the land adjoining a resi- 
dence is used as farm, truck garden, or orchard, or 
when adjacent to a dwelling is a shop in which the 
occupant engages in economic production. 

The price of land is determined by interrelations 
between supply and demand, as is the price of all 
other utilities. But as land is immovable, supply 
and demand for land in a particular area may be 
very nearly or quite independent of the supply 
and demand for land otherwise situated. In the 
sale of land, as of any other utility, the owner will 
endeavor to obtain as much for it as he can, the 
buyer to pay as little as he can. Its price will be 
the highest that any one will pay for it for any 
purpose to which he may wish to devote it. The 
price of land utilized as a farm or a ranch, and 
available for no other purpose, will depend upon 
the profit that the buyer believes he can obtain by 
means of its utilization as a farm or a ranch. 



126 THE FLOW OF VALUE 

Land which has been utilized as a farm, but which 
a buyer believes can be utilized as sites for dwell- 
ings, may be sold at a price upon which the buyer 
thinks he can obtain profit by cutting it up into 
lots. Land so situated as to be available for a 
manufacturing site, a warehouse, or a store will 
command the price upon which a buyer believes he 
can obtain profit by means of its utilization for 
such a purpose. Land utilized for residence, if it 
is so situated that it can be utilized for commer- 
cial purposes, may bring a higher price than if it 
were available only for residence. A man who 
desires to buy it for continued use as a residence 
will have to pay as much as could be obtained from 
him who believes he can secure profit from its 
utilization as part of an instrument of produc- 
tion. 

It seems absurd to talk of the cost of production 
of land. But from time immemorial the struc- 
tures erected upon land — roads, fences, drainage, 
and everything so attached to it as to be impos- 
sible or impracticable of removal or of separate 
utilization — ^have been held to be part of the land. 
Thus land and what are designated as improve- 
ments are classified as real estate. There has 
been the cost of the improvements and there have 
been the taxes. Therefore, it is not entirely 
anomalous to speak of the cost of production of 
real estate. The owner of real estate will en- 
deavor not to sell it for less than its total cost to 



USE OF MACHINES 127 

him, whether or not it has been * improved. ' ' In 
any event he will endeavor not to sell it for less 
than can be obtained for adjoining and equally 
available land. 

As a population increases, land once so remote 
as not to be available for any purpose may yield 
profit if cultivated as a ranch or a farm. As 
centers of population develop contiguously, it may 
become available for residence. As it comes 
within the limits of town or city, it may be avail- 
able for sites for manufacturing or mercantile 
establishments. The increases in the prices that 
can be obtained, as its situation causes it to be 
more and more available for that utilization by 
means of which greater and greater degrees of 
profit can be secured, have been designated *^ un- 
earned increment,'^ because the increased avail- 
ability has been due to no effort of the owner. 
During these progressive increases in the price, 
however, property in the land has usually been 
transferred many times. It may have been 
bought from time to time by those who believed in 
its availability increasing in the future; that is, 
because of its potential availability. Their belief 
often is justified and often is not. Moreover, it 
is not always that increased availability has not 
been due to effort of the owner. For example, 
remote and uncultivated land granted by govern- 
ment to the projectors of a railroad acquires 
availability because the railroad affords facility 



128 THE FLOW OF VALUE 

for transportation that would not otherwise have 
come to it. 

It is because of the facility for obtaining sub- 
stance, or employees, or marketing products that 
land becomes available for manufacturing sites. 
It is the contiguity of office buildings to other office 
buildings between whose occupants, and between 
whose occupants and their patrons, there must be 
frequent intercourse, the convenience of banks, 
hotels, theaters, and retail establishments for the 
service of the greatest number of patrons, that 
cause the high prices of land whereon such build- 
ings are erected. There would not be such high 
prices were not profit obtained by those who so 
utilized the land, and these would not obtain profit 
were there not an intensity of demand for the 
utilities produced by means of that utilization. 
Therefore the so-called unearned increment ap- 
plies not only to those who have property in the 
land, but to every one who obtains utilities pro- 
duced by means of its utilization. The so-called 
unearned increment arises from interrelation be- 
tween supply and demand which enables high 
profit to be obtained from its utilization. There 
may be changes in these interrelations. Because 
of mutations in the markets for products, the 
prices obtainable for manufacturing or mercantile 
sites may decrease. Streets once frequented by 
purchasers of means may become deserted by 
them. Thus land for which increasing prices have 



USE OF MACHINES 129 

been obtained may so lose its availability that the 
owner, if he sell it, will be obliged to accept a lower 
price than has been paid. Unearned increment 
may be transmuted into unearned decrement. 

Profit accrues from the sale of a utility at a 
higher price than has been paid for it. That which 
is sold may be a given measure of a given utility 
at a particular time, as an acre of land or other 
source of substance, or an instrument of produc- 
tion, such as a warehouse or a manufacturing 
plant; or a final utility, such as a residence, a 
pearl, or a painting. The expression of profit in 
such cases as these would be that obtained from 
the sale of one concrete utility. Of this nature 
would be the profit or loss accruing to one from 
the sale of a utility in which he had property but 
in the production of which he had no part except 
that of producing it at the time and place of sale. 
For example, its owner may sell a precious stone, 
a work of art, an object of great rarity at a profit 
because of its appeal to collectors. 

Also one engaged in the production and sale of 
staple utilities of widespread demand secures 
profit or sustains loss as he receives more or less 
than he has expended. His total of debits may 
consist of various expenditures in different 
amounts for divers purposes, and his total of 
credits of the receipts from many sales at different 
prices. 



130 THE FLOW OF VALUE 

Profit may continuously be obtained by one re- 
sponsible for any stage of production, from the 
gathering of substance to that application of effort 
which, by bringing a final utility from the shelf of 
a retail store to the counter, produces it where it 
may be examined by a purchaser. There may be 
periods in which his profit is less or greater than 
during other periods. There may be intervals 
during which he sustains loss that must be coun- 
terbalanced by profit obtained during other pe- 
riods, or else he will be forced out of production. 
Therefore, the expression of profit secured or loss 
sustained must be for certain periods. In order 
that the profit or loss of one period may be com- 
pared with that of another, it is necessary, as a 
rule, that the expression be for periods of equal 
duration, for a week, or a month, or more custom- 
arily for the year. If, however, the processes of 
production and sale be conducted within a period 
of definite even though varying limits, such as that 
of a particular season, the expression of profit and 
loss may be for that period. 

In vastly the greater proportion, the flow of 
debits and credits is derived from the buying and 
selling of all that contributes to the production of 
final utilities of general demand. Inasmuch as all 
the processes of production are directed toward 
the production of these final utilities, and as it is 
from the sale of these final utilities that are ob- 



USE OF MACHINES 131 

tained the credits which enable the continuance of 
all of the processes of their production, it follows 
that, in greater proportion, the flow of debits and 
credits depends upon the buying and selling of 
these final utilities. From the credits received by 
the sellers of final utilities there is a succession of 
debits and credits that pass to the ultimate pro- 
ducers of substance. At each stage of the con- 
version of debits into credits and credits into 
debits, profit may or may not be obtained by cer- 
tain of those responsible for a given phase of pro- 
duction, but as production must continue and to 
its continuance there must be profit, it follows that 
profit must be attained by a proportion of the 
producers. It is those who thus obtain profit who 
are enabled to apply force in future production. 
Therefore, profit must be obtained by those whose 
efforts are requisite for further production. 

When we say that one person obtains greater 
profit than another, we mean that from the produc- 
tion and sale of utilities he may obtain greater 
command over utilities than another. As the 
measures in which all utilities are bought and sold 
are expressed in terms of the dollar, profit is ex- 
pressed in terms of the dollar. He who obtains 
greater profit than another obtains a greater sur- 
plus of credits over debits expressed in dollars. 
If there be two persons who put forth their effort 
in the production of utilities of the same kind, and 
the same prices per unit can be obtained for the 



132 THE FLOW OF VALUE 

largest total they can produce, that one who most 
efficiently applies his effort will produce the 
greater volume and, therefore, obtain the larger 
profit. If, as the supply increases, the price has 
to be reduced in order to effect the sale of the 
volume produced by both of them, the more effec- 
tive will continue to obtain a greater total of credit 
for the larger volume he produces, and thus if the 
price gradually diminishes will obtain profit at a 
price that will not yield profit to the other. The 
more effective producer, by reason of greater ca- 
pacity, may have exerted a greater number of 
force-units and thus produced a greater volume of 
utilities, or by greater skill he may have applied 
a smaller number of force-units in the production 
of a greater volume of utilities. 

It is likewise with organizations, engaged in 
production, composed of employer and employees. 
The more efficient the individuals constituting an 
organization and the more effectively their ef- 
forts are coordinated and directed, the greater the 
volume of utilities that can be produced in rela- 
tion to the number of persons engaged in their 
production. Therefore, the greater will be its 
profit if the same prices are obtained as by a less 
effective organization, or, if prices are reduced, 
the longer can it continue to obtain profit than the 
less effective organization. 

It is so also with an organization utilizing struc- 



USE OF MACHINES 133 

tures, machines, and appliances, all that consti- 
tutes a plant. Its effectiveness will depend not 
only upon the efficiency of the individuals of the 
organization and the efficiency with which their 
efforts are directed and coordinated, but also upon 
that adaptability of structures, machines, and ap- 
pliances which permits the most effective applica- 
tion of force through their utilization. The more 
efficient plant will be that by means of which the 
greatest volume of utilities can be produced in re- 
lation to the number of persons engaged in its 
operation. Its efficiency will also be affected by 
its productive capacity in relation to the number 
of persons whose efforts have been applied in pro- 
ducing it. The efficiency of a plant will, there- 
fore, depend not only upon the intelligence with 
which it is operated, but also upon the intelligence 
with which it has been designed and constructed. 
The intelligence of him responsible for the trans- 
formation of substance by means of the plant will 
be manifested by the judgment with which he has 
selected and purchased each instrument that en- 
ters into it. The best judgment will lead to the 
purchase of the instrument that will contribute to 
profit in the greatest proportion in relation to the 
price paid for it. And so also every one respon- 
sible for the construction, from the gathering of 
the substance throughout its transformation into 
the completed instrument, will have shown his 



134 THE FLOW OF VALUE 

ability not only in the efficiency of the immediate 
phases of the production but also in the selection 
and purchase of that which he transforms. 

As the production of utilities increases in vol- 
ume, the tendency is for their prices to be reduced. 
Therefore it is that the continuing tendency is to 
compel that efficiency in production by means of 
which profit can be obtained at prices that tend to 
decrease to the lowest at which the most effective 
producer can obtain profit; and thus to compel 
production to be effected by the efforts of the 
smallest number of persons in relation to the vol- 
ume produced. 

But always and inevitably credits are derived 
from the sale of utilities in the form of human 
effort, or of utilities that have been produced by 
the application of human effort. Credits can not 
be expended except for human effort, or for the 
results of human effort. As the population in- 
creases and expands, there is the production of an 
ever greater variety of utilities. As the produc- 
tion and sale of utilities of every kind is in volume 
that increases in relation to the efforts expended, 
credits tend so to accumulate in the possession of 
the more effective that they can purchase all of 
the final utilities they desire for personal use and 
consumption and have credits remaining. 

Then those who believe they can utilize credits 
in the attainment of profit will offer to pay for the 
right to their utilization. Thus evolves interest 



. USE OF MACHINES 135 

in the sense in which it has come to be a factor in 
industry and commerce. Interest emerges after 
profit has emerged. It is that paid by one for the 
right to utilize the credits accumulated by another. 
The intent is that it be paid from the further 
credits obtained by means of the utilization. 

This and the four preceding chapters have 
shown that as population increases there is an in- 
creased specialization of effort which tends to be 
directed and coordinated, whether in immediate 
application or through machines, toward the pro- 
duction of utilities increasing in volume and vari- 
erty in relation to the number of persons engaged 
in their production. Prices for utilities of any 
kind tend to be the lowest which will enable the 
least efficient, whose effort is required in any kind 
of production, to continue therein. This applies 
to the employer whose reward is in the form of 
profit, and to the employee whose reward is in the 
form of wage. Profit tends in increasing degree 
to accrue to the employer who is more efficient and 
more effective in production, and higher wage to 
the more efficient and more effective employee. 



X 



THE ACTUAL DEVELOPMENT OF INDUSTRY AND 
COMMERCE IN THE UNITED STATES 

The industrial and commercial development of 
the United States actually did proceed approxi- 
mately in accordance with the hypothetical devel- 
opment outlined in the preceding chapters. 
Throughout the century and a half succeeding the 
establishment of the first white settlements, there 
were few radical perturbations in the relations 
between the supply of and the demand for such 
staple utilities as were then bought and sold. 
Principal economic changes were in the relations 
between the areas of land that were cultivated, 
and the population that cultivated them. When 
the supply of soil, forests, and mines was great in 
relation to the human effort available for their 
utilization, the prices of these sources of substance 
were low. As the population increased the prices 
for these resources increased, especially as their 
situation made them available for utilization to 
the advantage of developing centers of population. 
For many generations there were few who were 
very rich, and few who were very poor, judged by 
the standard of the times. Any one could make 

136 



DEVELOPMENT IN UNITED STATES 137 

a living except the physically, mentally, or 
morally defective. 

About the beginning of the nineteenth century 
there was that application of steam which brought 
the steamboat, the railroad, the mill, and the fac- 
tory. There was increasing immigration of many 
who settled upon the land, and also of many who 
did not, who in large proportion were capable of no 
more than physical effort, and who sought employ- 
ment. Thus it was that while through the utiliza- 
tion of structures, machines, and appliances the 
proportion of human effort required in the pro- 
duction of many utilities decreased there was often 
a disproportionate increase in the number of those 
whose support depended upon the production. 
As, however, it was the policy of the federal and 
state governments to encourage the utilization of 
the vast uncultivated areas by according property 
in land gratis or at nominal prices, the nation, for 
many decades, assimilated without much disturb- 
ance the activities of nearly all who came to its 
shores. The disposal of lands, mines, and forests 
proceeded until, toward the close of the nineteenth 
century, property had been acquired in very 
nearly all of these resources by individuals, or 
by industrial and commercial organizations. 

There was rapid progress in the invention and 
utilization of machines. Even though there 
quickly arose new opportunities for employment, 
this progress tended for a time to displace many 



138 THE FLOW OF VALUE 

who had been trained in the handicrafts, and thus 
often caused temporary privation. This was co- 
incident with relatively high wages in the new 
occupations because of the relatively small supply 
of those with the requisite experience and capac- 
ity. Thus the relation of utilities to the dollar 
came no longer to be determined through an ap- 
proximately even and regular development. In 
general, however, during the earlier decades when 
effort applied to the soil produced agricultural 
products that met the wants of a greater number 
of persons than did the manufactured articles 
resulting from the application of corresponding 
effort in the crude processes of transformation, 
the prices of foodstuffs were low in relation to the 
prices for manufactured articles. As with the ex- 
tending use of machines manufactured products 
increased in relation to the effort applied in their 
production, their prices decreased in relation to 
the prices for foodstuffs. As the fertile Missis- 
sippi Valley was devoted to grain and grazing, and 
as manufacturing developed in the East, the prices 
of all staple utilities tended to diminish in relation 
to the effort applied in their production. 

During the last quarter of the nineteenth cen- 
tury, the open-hearth furnace and improved ma- 
chinery led to a great displacement of human effort 
in making steel ; as its cost of production radically 
decreased and its use radically extended, vast 
profit attended its manufacture. Coincident with 



DEVELOPMENT IN UNITED STATES 139 

the extending application of electricity was the 
electrolytic reduction of copper ore which fur- 
thered that extension. The planting of rubber 
trees in the Far East vastly increased the supply 
of rubber, and invention rapidly extended its uses. 
There was a phenomenal advance in the use of 
machinery in the processes of agriculture. The 
organization of the oil industry led to the more 
extended and varied use of the viscous fluid. 
The use of aluminum extended. The making of 
paper from wood pulp and the discovery of proc- 
esses whereby pictures could cheaply be repro- 
duced multiplied the serviceableness of the print- 
ing press. 

There was impetus to the formation of great 
corporations, which promoted specialization and 
coordination in the processes of production. The 
extension of the railroads and the cheapening of 
railroad transportation extended and diversified 
the channels of traffic. Substance was brought 
from remote sources to places of manufacture, and 
products were conveyed from places of manufac- 
ture to remote places of demand. Very nearly all 
utilities came to be provided by specialized effort 
in which the activities of all men were more and 
more closely interwoven. No longer was there a 
semblance of self-sufficiency except in out-of-the- 
way places. The development of industry and 
commerce was through a series of convulsions. 
The dollar that once measured the prices of the 



140 THE FLOW OF VALUE 

exceptional things that were bought and sold, be- 
came a factor in nearly every phase of nearly 
every relation between man and man. 

During the upheaval the forces of supply and 
demand came to apply over wider and wider areas, 
throughout which, because of local relations be- 
tween supply and demand, there were wide varia- 
tions in prices. Thus there were opportunities 
as never before for traders who, by buying in one 
market and selling in another, tended to adjust the 
relation between supply and demand over extend- 
ing areas. There was the flow of effort from agri- 
cultural to manufacturing pursuits. Therefore 
during the first decade of the twentieth century 
the diminishing supply of foodstuffs, especially of 
the meats, in relation to the population brought an 
advance in their prices in relation to the prices for 
manufactured products. 

The rapidity of the changes in the courses of 
industry and commerce led to rL-Jical changes in 
the relation of utilities to the dollar, to great fluc- 
tuations in prices and in profit. There was an 
onrush of production, of buying and selling, that, 
even though retarded now and then by periods of 
depression, resulted in a continually accelerated 
augmentation of debits and credits. The produc- 
tion and consumption of millions of persons in- 
volved buying and selling that caused credits and 
debits and credit balances on the books of banks 
to be expressed in billions of dollars. Increase 



DEVELOPMENT IN UNITED STATES 141 

in the number and magnitude of business organ- 
izations expanded the flow of dollars to wage- 
earners. The more effective application of force 
caused profit to accumulate, making possible the 
investment of large aggregates of credit in return 
for interest. The increase in the volume and va- 
riety of final utilities and the diminution of effort 
in relation to production permitted the recipient 
of even the smallest wage to exercise a range of 
choice in his expenditure. At the retail stores 
there came to be less of bargaining in the sense of 
higgling over the price of a particular thing and 
more of that bargaining which finds expression in 
the purchase of a certain final utility at the price 
fixed by the merchant, instead of another utility 
from the same or perhaps from another merchant. 
But still it was that from the credits received for 
final utilities all of those applying effort in their 
production obtained the credits that enabled pro- 
duction to continue. 

As industry and commerce developed within the 
United States its trade with other nations ex- 
tended. At the beginning foodstuffs and other 
substances of the new country were exchanged 
for manufactured products of Europe. Then 
with the rise of manufacturing in the United 
States, its manufactured products entered into the 
exchanges with other countries. As a little de- 
veloped country enters into international com- 
merce it is naturally its substances that constitute 



142 THE FLOW OF VALUE 

the greater portion of its exchanges with other 
countries. With its further development there 
enters into such exchanges the intermediate util- 
ities and final utilities which can be advantage- 
ously transformed from its native substances by 
its native population. The processes of this 
transformation may be directed in whole or in 
part by those of skill and experience who have 
come from countries of higher development, and 
be effected by instruments of production obtained 
from such countries. The increase in exchanges 
leads to the extension and improvement of means 
for transportation, and these facilitate the further 
increase and extension of international commerce. 
Thus the forces of supply and demand operate 
over ever widening areas until there is the flow 
not only of matter-utilities from one country to 
another, but also of human beings pursuant to the 
working of these forces. 



XI 

THE EELATIVITY OF HUMAN EFFORT AND THE 
RELATIVITY OF HUMAN WANTS 

When industry and commerce liave attained a 
high degree of specialization, there is the clear 
differentiation of the factors that enter into pro- 
duction and consumption — of human effort, of 
cosmic force availed of and applied by human 
effort, of instruments of production, of sources of 
substance, of substance, of intermediate utilities, 
and of final utilities. Among one and another 
people, phases of the development of these factors 
may not have been in the sequence adopted for our 
hypothesis which approximates the actual devel- 
opment in the United States. But no matter what 
may have been the sequence, when these factors 
have been fully differentiated, their continuing 
interrelation is in accordance with the principles 
that have been disclosed by our analysis. 

Always the wants of the present must be sup- 
plied with existing final utilities that are the result 
of effort applied in the past, and always there 
must be the application of effort in the present to- 
ward the provision of the utilities that will meet 
the wants of the future. Wage-earners have 

143 



144 THE FLOW OF VALUE 

wants that can not be met unless they put forth 
effort, and thus they are impelled to work for 
wage. Those responsible for the production of 
substance, its transformation and sale, have wants 
that can not be met unless they enlist effort in the 
utilization of sources of substance, and of instru- 
ments of production. Therefore, they are im- 
pelled to that utilization which compels the enlist- 
ment of effort and the payment of wages. 

Throughout the seeming confusion that attends 
the industrial and commercial processes it often 
is difficult to perceive the underlying current, just 
as it is difficult to trace the working of the forces 
that resolved the primal nebulous mass into plane- 
tary systems, to trace through eddy and foam the 
current of the whirlpool, to trace through pervad- 
ing electric radiation the electric current. But as 
we penetrate the penumbra we perceive that eco- 
nomic phenomena may be grouped in three classes 
of relations that are interrelated each with the 
others. There is the Relativity of Human Effort 
and the correlated Relativity of Human Wants, 
the Relativity of Prices, and the Relativity of 
Profit. In this chapter will be summarized that 
which the preceding analysis has revealed in re- 
gard to the Relativity of Human Effort and the 
correlated Relativity of Human Wants. 

Because there is in all production and consump- 
tion the meeting of human wants by human beings, 



THE RELATIVITY OF HUMAN EFFORT 145 

the fundamental factors may be reclassified in two 
groups : 

First — The number of persons engaged in the 

production of utilities, and the force applied 

by them. 
Second — The aggregate of utilities produced, 

and the proportions in which they become the 

property of different persons. 

Human beings apply force to sources of sub- 
stance and to substance. The results of that ap- 
plication meet the wants of human beings. 

The utilities to the production of which each 
person contributes must meet the wants of others 
in order that he may obtain from them the utili- 
ties that meet his wants. The effort of one per- 
son may result in the production of utilities of a 
given kind sufficient to meet the wants of a greater 
number of persons than the utilities of the same 
kind, or of another kind, produced by another per- 
son. There will be differences not only in the vol- 
umes of respective utilities produced by respective 
persons, but also in the wants of different persons 
for these respective utilities. As each person 
contributes in greater or less degree to the pro- 
duction of utilities which others want, he will re- 
ceive in greater or less proportion of the utilities 
which others produce. 

Correlative with the production of utilities is 



146 THE FLOW OF VALUE 

the buying and selling of utilities; that is, the 
transfer of property in them. In every utility 
and in all utilities there is property. Property in 
final utilities must be either in those who have 
them for sale, or in those who have purchased 
them for use. A man may have property in util- 
ities produced by the application of effort that has 
emanated from himself, or by the application of 
effort that has emanated from others. If he buy 
utilities, even though they have been produced by 
the efforts of others, he applies his own effort in 
their purchase in that his mind determines upon 
the purchase and takes part in the determination 
of the price. If he sell utilities, even though 
they have been produced by the efforts of others, 
his own effort is applied in determining that they 
will be sold, and in taking part in the determina- 
tion of the price. Thus buying and selling are 
determined by effort of the mind. Demand un- 
derlies buying and supply underlies selling. 

It is the aggregate demand of all purchasers 
for a given final utility that determines the vol- 
ume in which it will be bought by them. The de- 
gree to which any person can exert demand will 
depend upon the demand for the efforts or the 
results of efforts in which he has property. The 
effort requisite to the production of a given vol- 
ume of utilities is that of those who will have to 
be supported in that production. Or if portions 



THE RELATIVITY OF HUMAN EFFORT 147 

of the effort of the same persons be applied in the 
production of utilities of different kinds, there 
must be received from the sale of all of the utili- 
ties of the different kinds that which will support 
all of the persons engaged in their production 
and all who are dependent upon them. If all of 
those receiving utilities do not directly contribute 
to the support of those whose efforts are put forth 
in their production, they must contribute to the 
support of others who must contribute to the sup- 
port of those whose efforts are thus put forth. 
Or else they will be supported without making any 
contribution to the support of others. Thus there 
is a relation between the effort expended in pro- 
duction, the number of persons applying that ef- 
fort, the volume of utilities which results from 
that application, and the number of persons whose 
wants are met by that volume. 

As each person pays as little as he can for that 
which he receives and parts with as little as he 
can for what he obtains, it follows that no one 
will pay more to one person for given utilities 
than that for which he can obtain them from an- 
other. Those who pay wages are responsible for 
the production and sale of utilities. The em- 
ployer will pay no more wage to employees of the 
respective grades of efficiency than that for which 
he can obtain the efforts of other employees of 
like efficiency. Thus there is the tendency for 



148 THE FLOW OF VALUE 

each person engaged in production to receive pay- 
ment in proportion to Ms contribution to produc- 
tion. 

It is through those responsible for the sale to 
the final purchaser of the final utilities that all of 
the forces applied in production converge in meet- 
ing the wants of all persons. Therefore it is 
through those thus responsible that are balanced 
the forces applied, the number of persons en- 
gaged in the application, and the utilities pro- 
duced, on the one side; the number of persons 
whose wants are met by these utilities, and the 
proportions in which these utilities flow to them, 
on the other side. 

Each person buys utilities that meet his wants. 
As his wants for the essential utilities continue, he 
is obliged continually to buy of the essential util- 
ities. Therefore, there must be the continual pro- 
duction of the essential utilities. He exercises a 
certain range of choice as to the essential utilities 
he will buy, and as to the less essential and non- 
essential utilities he will buy. The fact that he 
buys certain utilities to meet certain wants at one 
time affords some indication that he will buy such 
utilities to meet those wants at another time. 
Therefore, producers are led to continue in the 
production of utilities which they believe will 
meet wants; that is, for which they believe there 
will be demand. Those responsible for produc- 
tion will tend to continue in the production of 



THE RELATIVITY OF HUMAN EFFORT 149 

utilities of the kinds for which they will receive 
the greater return. Thus it is that the proportion 
in which respective final utilities are bought by 
final purchasers tends to determine the number 
of those who will continue to be responsible for 
their respective production, and the number of 
those who will be employed as wage-earners in 
their respective production. 

From all sources of substance are obtained the 
substances that are transformed into the final util- 
ities. Substance may be bought at each stage by 
those responsible for its furtherance toward the 
final transformation, and the product resulting 
from the application of their efforts may be sold 
to those responsible for its furtherance to another 
stage. As substance of one kind can be trans- 
formed through any of various processes into final 
utilities of different kinds, there is the responsi- 
bility at each stage for the direction that further- 
ance shall take. Thus it is, for example, that there 
are those who buy hides for transformation into 
shoes, others who buy them for transformation 
into trunks, and others for transformation into 
harness. All of a given volume of substance may 
be furthered in its transformation into utilities of 
the same kind, or in different proportions in trans- 
formation into utilities of different kinds. Each 
stage of furtherance involves the application of 
effort. The effort of a number of persons may 
be applied exclusively in the transformation from 



150 THE FLOW OF VALUE 

one stage to another, or portions of the respective 
efforts of many persons may be so applied. 
Whether the effort of all of the persons engaged 
be exclusively applied at one stage or another, 
or whether portions of their effort be so applied, 
there is involved, in the production of a given 
volume of final utilities of whatever kind, a total 
of effort. The prices -obtainable for final utilities 
determine the proportions in which effort is ap- 
plied in the respective phases of the production 
of utilities of each kind. 

Those who respectively assume the responsibil- 
ity for the transformation at each stage are 
obliged to receive credits that at least offset their 
debits, if they are to continue in the respective 
phase of production. If for example, the sub- 
stance transformed be wool, the final utilities in 
the form of clothing emerging from the shop of the 
tailor have to be suffixiient at least for that number 
of persons whose efforts produce credits that at 
least offset the debits incurred by the grower of 
sheep, the shearers, -cleaners, and carders of wool, 
the weavers of cloth, -and the makers of the cloth- 
ing. 

The aggregate of utilities produced is composed 
of the results of the efforts of all of the persons 
engaged in production. The effort applied to- 
ward the production of final utilities of all kinds 
is the aggregate of the efforts applied toward the 
production of final utilities of each kind. All per- 



THE RELATIVITY OF HUMAN EFFORT 151 

sons are using and consuming final utilities at the 
same time that all persons engaged in production 
are putting forth their efforts in ways that di- 
rectly or indirectly further the production of final 
utilities. The proportion of the aggregate effort 
devoted to the production of the essential under- 
lying utilities will determine the proportion that 
can be devoted to the -production of other utilities. 
The less the proportion of effort required in the 
production of the essential underlying utilities, 
the less, other things equal, will be the proportion 
of effort required to obtain the credits with which 
they can be purchased. That is, the smaller the 
number of persons who produce the essential un- 
derlying utilities, the less will be the proportion 
of the effort of others, that is of the aggregate of 
effort, required to supply them with the things 
they want. And so also with other utilities. 

The preceding paragraphs lead to the deduction 
that there must be a relation between 'the effort 
expended in the production of utilities of each 
kind and the effort expended in the production of 
utilities of every other kind. This is true even 
through transactions so circuitous that it is diffi- 
cult to perceive that it is really the exchange of 
the results of effort which underlies them. For 
example, when a Western ranchman, who, after 
applying effort for a week, buys with his wage 
from the nearest store a suit of clothes made, in 
a remote city, of wool from the hills of New Eng- 



152 THE FLOW OF VALUE 

land and of cotton from the plantations of the 
South, there has been obtained in exchange for 
his week's work the results of the effort of thou- 
sands of persons. 

As persons of high degrees of skill and ca- 
pacity are comparatively few, the volume of that 
production to which the exclusively applied effort 
of such individuals is requisite will be small in 
relation to the entire population. But when such 
effort is exerted in directing and coordinating the 
efforts of those of lower capacity, utilities are 
produced in far greater volume in relation to the 
effort expended than would be possible without 
such direction. This is especially the case with 
great administrative ability, which is rare indeed. 
Then again, while great creative ability may find 
expression in only a few architectural monuments, 
a few paintings, a few statues, a few books, a few 
musical compositions, any one of these may con- 
tribute to the intellectual or emotional elevation of 
thousands. The great creative ability of an in- 
ventor may find expression in a machine that 
vastly enhances the production of utilities of gen- 
eral demand. 

To recapitulate: the utilities that meet human 
wants are produced by the application of human 
effort; no more of wants can be met than are 
supplied with the results of effort. Human ef- 
fort is applied in different proportions to meet 
human wants in different proportions. The pro- 



THE RELATIVITY OF HUMAN EFFORT 153 

portions in which effort is applied in the produc- 
tion of the utilities of the different kinds, and the 
proportions in which these utilities pass into the 
possession of different persons, are determined by 
the number of persons engaged in the production 
of utilities of a given kind whose wants are met 
by the number of persons respectively engaged in 
the production of utilities of other kinds. 



XII 

THE RELATIVITY OF PEICES 

The relation between the respective measures 
of force applied by different individuals in pro- 
duction, and the proportions in which the results 
of that application become the property of differ- 
ent individuals, finds expression in price. 

As the dollar is a unit which measures the rela- 
tion of force applied to wants met, and all wants 
are met by the application of force, it is through 
buying and selling in terms of dollars that the 
force applied in producing utilities of a given kind 
is balanced against the force applied in producing 
utilities of another kind. It is human beings who 
are responsible for the results of the application 
of force which are bought and sold; it is human 
beings who receive dollars for the results of effort 
for which they are responsible ; and to human be- 
ings are paid dollars for the results of effort for 
which they are responsible. That is, while dollars 
are paid for utilities, they are paid to human be- 
ings ; while dollars are received for utilities, they 
are received by human beings. 

Let it be supposed, for example, that to the 
production of a volume of utilities x, consisting 

154 



THE RELATIVITY OF PRICES 155 

of 120 units, are requisite the efforts of a dozen 
persons; and that to the production of a volume 
of utilities y, consisting of 240 units, are likewise, 
requisite the efforts of a dozen persons. Let it 
be supposed that each of the twelve persons pro- 
ducing the utilities x wants twenty units of utility 
2/, and each of the twelve persons producing util- 
ity y wants ten units of utility x. The results of 
the efforts of one group of twelve persons exactly 
balance the results of the efforts of the other 
group of twelve persons. If to the production of 
each utility the efforts of each person have con- 
tributed in equal degree, the effort of each of the 
first group has resulted in the production of ten 
units of utility x, and the effort of each of the 
second group has resulted in the production of 
twenty units of utility y. The ratio to the unit 
of exchange would be ten units of utility x and 
twenty units of utility y. If this unit of ex- 
change be the dollar, one dollar will purchase 
ten units of utility x and twenty units of util- 
ity ^. 

Now let it be supposed that there are many 
groups, each composed of persons engaged in the 
production of utilities of a given kind. The util- 
ities produced by each group are wanted by vari- 
ous individuals of the other groups. The utilities 
produced by each of the several groups may be 
wanted by the individuals of other groups in 
different proportions. The measure of utilities 



156 THE FLOW OF VALUE 

of any kind that will be sold for a dollar depends 
upon the measures of utilities of other kinds that 
can be bought for a dollar. If the demand is 
greater in relation to the supply of utilities of a 
given kind produced by a certain proportion of 
effort, than the demand in relation to the supply 
of utilities of another kind produced by the same 
proportion of effort, the dollar will purchase 
more of utilities of the latter kind than of the 
former. Therefore, while the dollar in relation 
to one utility is a measure of the result of force 
applied to matter, and the dollar in relation to 
another utility is a measure of the result of force 
applied to matter, the dollar does not indicate 
that equivalent measures of force have been ap- 
plied. It indicates that the respective results 
of the respective measures of force applied are 
equivalent from the standpoint of meeting human 
wants. 

Other things equal, the utilities produced in 
greatest volume in relation to the effort expended 
are those that would be sold at the lowest price. 
That is, a greater measure could be obtained for 
the dollar than of other utilities in the production 
of which a relatively greater proportion of effort 
is required. The reason for this is that a rela- 
tively smaller number of persons need to be sup- 
ported in their production. Therefore, other 
things equal, the prices of respective utilities of 
different kinds would tend to be determined by the 



THE RELATIVITY OF PRICES 157 

number of persons engaged in their respective 
production. But, because of difference in de- 
mand, other things are not equal. 

Differences in the relation of effort applied to 
the demand for the results of its application may 
be illustrated by two exanaples. In the production 
of fabrics made of cotton is necessary the effort 
of a large number of persons in planting, picking, 
packing, ginning, transporting, compressing, card- 
ing, spinning, weaving, and dyeing. It is differ- 
ent with the various products of mineral oil. 
They result from the application of the efforts of 
a comparatively limited number. There is not the 
cultivation of the soil, the planting of seed, or 
laborious gathering by hand. In the drilling of 
a well and the construction of pipe lines are requi- 
site the efforts of many, but the gushing forth of 
the oil and its flow through the pipes to the tanks 
and to the refineries is due in greatest measure 
to cosmic force that is supplemented by human 
effort in small proportion. But oil is in wide 
demand. Mineral oil as a lubricant displaced ani- 
mal oils, enabling the operation of machines in- 
calculably greater in number. It also displaced 
animal and vegetable oils as an illuminant in 
countless households throughout the world. In 
many places it has displaced coal as fuel both in 
furnace of stationary and locomotive engine, and 
the supply has with difficulty kept pace with the 
demand for its use in generating power for auto- 



158 THE FLOW OF VALUE 

mobiles. Mineral oil, moreover, is of widespread 
medicinal use. Therefore the application of a 
given measure of effort in producing certain prod- 
ucts of mineral oil brings in return greater com- 
mand over utilities in general than the applica- 
tion of an equivalent measure of effort in pro- 
ducing certain fabrics of cotton. 

"When each seller strives to obtain the greatest 
number of dollars he can for utilities of a given 
kind, he is striving that the smallest measure of 
these utilities have the ratio of the dollar. When 
each purchaser strives to pay the smallest number 
of dollars he can for utilities of a given kind, he 
is striving that the greatest measure of these util- 
ities have the ratio of the dollar. Thus when a 
man strives to sell the smallest measure of utili- 
ties in relation to the dollar, he is striving to ob- 
tain other utilities in the greatest measure in re- 
turn for the utilities he sells. Likewise, when 
any purchaser strives to pay the fewest dollars he 
can, he is striving in return for utilities previously 
sold to obtain the greatest measure of the utili- 
ties he wants. 

The ratio of utilities of a given kind to the dollar 
is determined at any instant by the sale of those 
utilities at that instant. By bargaining between 
buyers and sellers, however, is established the 
ratios of respective utilities to the dollar that may 
apply over a smaller or a greater area for a 
shorter or a longer time. This ratio for utilities 



THE RELATIVITY OF PRICES 159 

of a given kind can never be lower than that of 
the greatest measure with which a seller will part 
for a dollar, and can never be higher than that 
of the smallest measure for which a purchaser will 
pay a dollar. Bargaining between many buyers 
and many sellers tends to narrow the range of 
prices. The wider the area over which the bar- 
gaining prevails, the more widely information is 
diffused as to prices. Therefore, the tendency 
will be for those engaged in the sale of utilities 
and in the purchase of utilities to know about 
what will be the ratio to the dollar of the utilities 
with which each is concerned. That is, when a 
man sells utilities for a given number of dollars, 
he knows about what measures of other utilities 
he can purchase with the dollars received; and, 
likewise, when he buys utilities for a given number 
of dollars, he knows about what measures of other 
utilities he could have purchased. Thus it is that 
when he sells for a given number of dollars, the 
seller consciously or subconsciously has in mind 
the utilities he can purchase with that number of 
dollars ; when he buys for a given number of dol- 
lars, the buyer consciously or subconsciously exer- 
cises preference for the utilities he buys over other 
utilities he might have bought. 

With the dollars in his possession available for 
the purchase of final utilities a man buys them in 
the order of their relative importance in meeting 



160 THE FLOW OF VALUE 

his wants. Let us suppose that the annual in- 
come of a family is one thousand dollars obtained 
as wages by its head, who has steady employment. 
Let us suppose that the family consists of man, 
wife, and children, and that its annual expenditure 
is about as follows : rent $180, furniture $50, food 
$300, clothing $200, newspapers, magazines, etc., 
$15, doctor $25, recreation $30, incidentals $100, 
insurance and saving $100. Let us suppose that 
these expenditures in these proportions are neither 
more nor less than sufficient to maintain the mem- 
bers of the family in the physical and mental effi- 
ciency of which they are capable. 

The food of such a family would consist in the 
main in certain proportions of beef, mutton, 
pork, poultry, eggs, butter, lard, milk, coffee, tea, 
flour, cornmeal, potatoes, cabbages, onions, and 
other vegetables, apples, oranges, bananas, and 
other fruits. As the supply of one or another of 
these articles becomes less or greater in relation 
to demand, its price rises or falls. For example, 
if the supply of beef at a certain time should so 
decrease as to cause an advance in price of sev- 
eral cents a pound, the family would be obliged to 
consume less of beef, or less of other foods, or 
else increase its expenditure for food. On the 
supposition that it decreased its expenditure for 
beef so that its total expenditure for food did 
not exceed $300 per annum, it would be obliged 
to buy more of other foods or else to reduce its 



THE RELATIVITY OF PRICES 161 

diet. Under our supposition it could not reduce 
its diet without impairing the efficiency of its 
members. It could not increase its expenditure 
for food without decreasing its expenditure for 
other utilities, and this also would impair the 
efficiency of its members. 

If it were to decrease its consumption of beef 
and buy more of other foods, the demand for beef 
would be decreased and the demand for other 
foods increased. If the budge-t of this family be 
typical of that of thousands of families, the de- 
crease in the demand for beef would be consid- 
erable, and the increase in the demand for other 
foods would be considerable. If the supply of 
beef were no greater than would be purchased by 
families with larger incomes, the growers, pack- 
ers, wholesalers, and retailers of beef might obtain 
profit at the higher prices. If the profit were 
considerable, more of beef might be grown, packed, 
and offered for sale. Prices might again fall so 
low as to place it within the means of families 
with incomes of one thousand dollars a year. 
This would not happen if the owners of the land 
on which beef were grown believed they could ob- 
tain greater profit in other production. More or 
less of land might be deflected from the raising 
of beef to the raising of wheat or cotton, sheep or 
hogs, and the consumption of beef might continue 
to be restricted to those of ample means. Its pro- 
duction would diminish, not because of lack of de- 



162 THE FLOW OF VALUE 

sire for it but because the demand for other food 
was more effective. The diminution would be in 
the supply of a highly beneficial utility. 

Now let us suppose that, of the expenditure of 
thirty dollars a year for recreation, this family 
had been wont to spend five dollars for a set of 
croquet such as bedecked lawn and yard of a 
generation ago, or for roller skates, the use of 
which subsequently became prevalent. A similar 
demand from the thousands of families would 
create a demand in the aggregate for sets of cro- 
quet and for roller skates that would give em- 
ployment, perhaps, to thousands of men in scores 
of factories; that would direct to the produc- 
tion of roller skates and sets of croquet por- 
tions of the force applied in felling trees and 
transforming lumber, in extracting ores and trans- 
forming metal. All of those engaged in the pro- 
duction of sets of croquet and roller skates would 
have to be provided with food, clothing, and shel- 
ter. That is, a proportion of the effort applied in 
the production of these essential utilities would 
be for the benefit of those who produced sets of 
croquet and roller skates. With the waning of 
the vogue for these implements of recreation effort 
devoted to their production necessarily was di- 
verted to other production or else there was a 
diminution of productive effort. If there were 
specialized machines that could not be utilized ex- 
cept in the manufacture of sets of croquet and 



THE RELATIVITY OF PRICES 163 

roller skates, those machines became useless. 
These are examples of diminution in the supply 
of a nonessential utility because of a diminution 
in the demand. 

Diminution in demand may follow the displace- 
ment of a final utility by one more effective. For 
example, that development of the phonograph 
which has led to the manifold reproduction of 
musical renditions caused the cessation of the 
manufacture of the old-time music box. Diminu- 
tion in demand for a final utility may follow a 
change in fashion, even though the utility dis- 
placed be not less serviceable than that which 
supersedes it. This is conspicuously the case with 
women's dress. It was exemplified when in great 
measure rugs displaced carpets for floor cover- 
ing. Machinery devised for the making of carpets 
passed out of utilization, and there was falling 
demand for the efforts of operatives trained and 
skilled in carpet manufacture. 

There may be variations not only in the supply 
of and demand for particular utilities but for 
groups of utilities. During the first decade of 
the twentieth century, manufacturing establish- 
ments engaged in the transformation of the woods 
and the metals into various utilities absorbed so 
much of the effort of the population that a con- 
siderably smaller proportion remained to be ap- 
plied in processes of producing food. The di- 
minishing supply of food in relation to the demand 



164 THE FLOW OF VALUE 

led to an advance in the prices. It might be that 
the family with an income of one thousand dollars 
a year could not obtain the food for which it had 
paid three hundred dollars except at an expendi- 
ture of five hundred dollars. Under our suppo- 
sition, if it were to reduce the consumption of 
food, the efficiency of its members would be im- 
paired. The advance of two hundred dollars 
would more than absorb its savings, its inci- 
dental expenditures, those for recreation, for med- 
ical attendance, and for newspapers and maga- 
zines. If the head of the family were employed 
in a factory himself, it might be that the increase 
in its profit would enable his wages to be advanced 
in the same proportion as his cost of living. But 
the supply of food would not thereby be increased. 
If the budget of that family were typical of thou- 
sands of families, and the incomes of these thou- 
sands of families as expressed in dollars were 
advanced proportionately, the supply of food 
would not be thereby increased. The thousands 
of families would be bidding for the available 
supply, and the prices as expressed in dollars 
would so advance that they might not be any 
better off than before. If the incomes, as ex- 
pressed in dollars, of part of the families were 
advanced, these families might be enabled to make 
their customary purchases of food, but those with 
incomes remaining at one thousand dollars could 
not. 



THE RELATIVITY OF PRICES 165 

It is well here to recall that the fundamental 
significance of price is not the number of dollars 
obtained for a measure of utilities, but the meas- 
ure of other utilities that are obtained. In the 
light of this fundamental significance the dollar 
is a unit that facilitates buying and selling in that 
a measure of any utility bears a ratio to this unit. 
When a man sells utilities of a given kind at a 
given time, the measure that has the ratio of 
the dollar is determined by the interrelations be- 
tween supply and demand at that time. If he re- 
tains the dollars received for expenditure at a 
future time, he does not obtain utilities in return 
for the utilities he has sold until a future time. 
Then there may have been such a change in the 
interrelations between supply and demand that a 
greater or less measure of utilities of a given kind 
can be obtained for that number of dollars. If 
he then is obliged to pay a greater number of dol- 
lars for a given measure of utilities, he obtains in 
different measure of the results of force applied 
to matter. If a wage-earner were to demand and 
receive a greater number of dollars because of 
an advance in the price of these utilities, the 
employer, other things equal, would endeavor to 
obtain more of dollars for the utilities for the pro- 
duction of which he was responsible. Their pur- 
chasers, in order to offset the advance, would 
endeavor to obtain more of dollars for the utili- 
ties they produced and sold. If this process were 



166 THE FLOW OF VALUE 

continued, more of dollars would finally have to 
be demanded for the utilities, the advance in the 
price of which started the series of advances. 
When the circuit was thus completed, the actual 
prices of utilities, that is the prices of utilities as 
measured by utilities, would be the same as be- 
fore the circuit was begun. Thus, while the same 
measure of utilities of one kind would bear the 
same ratio to the same measures of utilities of 
other kinds, they would bear a different ratio to 
the dollar. There would have been no change in 
actual prices ; the change would be in the relation 
to the unit of exchange. That is, this would be the 
case provided the relation of utilities produced, 
to the wants for those utilities, remained the same. 
Let this point be made clear by extending the 
analysis to the ultimate factors in production. 
As force is applied, it follows that there must be 
units of force applied. As wants are met, it fol- 
lows that there must be units of wants met. In 
a state of self-sufficiency, a man applied force- 
units when he used his hands in procuring that 
which he wanted, and want-units were met by that 
which he procured. The force-units he applied 
resulted in the satisfaction of his want-units that 
were met. In an easy environment less effort 
might be required in meeting wants than in a 
difficult environment. For example, a native of 
the tropics, who picked bread-fruit from a tree and 
wore a breech-clout, exerted less effort to meet 



THE RELATIVITY OF PRICES 167 

his wants than the Eskimo obliged to kill seals 
to obtain their furs for clothing and their fat for 
food. If an Eskimo had to work harder at one 
time than another to obtain the furs and the food 
that served his wants for an equal period, he 
would be applying more force-units to meet the 
same number of want-units. If, for example, he 
thus had to work twice as hard at one time as 
at another time, it would be perhaps that ten 
force-units supplied one want-unit at one time, 
and five force-units supplied one want-unit at an- 
other time. Let it be supposed that the fur and 
fat constituting one want-unit sustained the vital- 
ity that enabled the Eskimo to put forth five force- 
units. 

If we allow ourselves to indulge in the fantasy 
that the Eskimo kept accounts with himself, and 
tried to adjust the relation of his force-units to 
his want-units, he might designate the five force- 
units applied at the preceding time as five dollars, 
or one dollar, or fifty cents, or ten cents. If he 
designated them as one dollar, and thus credited 
his force account with one dollar when it had 
provided five force-units, he would have to debit 
his want account with one dollar because of the 
one want-unit met. The relation of force-units to 
want-units would be as five to one. The unit of 
exchange that would buy ^ve force-units would 
buy one want-unit, or vice versa. If, when he 
came to replace that want-unit, he found he was 



168 THE FLOW OF VALUE 

obliged to put forth ten force-units, he might, at 
the price previously established for force-units, 
credit his force account with two dollars. If he 
also at the price previously established for want- 
units debited his want account with one dollar, 
his bookkeeping would show a balance of one dol- 
lar to the credit of his force account. But these 
ten force-units had been expended, and his want 
account had received in return one want-unit which 
would enable him to exert only five force-units. 
If, on the contrary, he had on the basis of what 
his wants had received from the ten force-units 
credited his force account with one dollar and 
debited his want account with one dollar, the want- 
unit would still enable him to put forth only five 
force-units, which, if the conditions continued, 
would enable the production of only one-half a 
want-unit. That is, when his want account was 
credited with force-units produced, it could at the 
preceding price be credited with only one-half 
dollar. Thus, if the Eskimo tried to reimburse 
himself for his increased cost of living by doubling 
his wages as expressed in dollars for effort put 
forth, he would receive no more for his two dol- 
lars than he had previously received for one. 
If he tried to reduce his expenses by insisting that 
his want account would pay no more for the want- 
unit than the previously established price of one 
dollar, his credit of one dollar to the want-unit 



THE RELATIVITY OF PRICES 169 

account would purchase but half of the force- 
units requisite to replace the want-unit. 

If we indulge in the further fantasy that the 
situation developed in that Eskimo a logical mind, 
an ability to face the facts, he might discover that 
the only way he could maintain equilibrium be- 
tween his force account and his want account 
would be to increase the force-units applied by 
means of one want-unit, or to decrease the want- 
units received in relation to the force-units ap- 
plied in their production. 

The logic of the situation developed by this fan- 
tastic supposition finds close analogy in our de- 
veloped stage of industry and commerce. Instead 
of effort by one man being put forth to meet his 
individual wants, the efforts of all persons en- 
gaged in production are put forth to meet the 
wants of all persons supported by the utilities pro- 
duced. The purchasers of the final utilities pay 
for all of the effort that has been applied in their 
production. If final purchasers are obliged to 
pay more dollars for a given final utility, their 
purchase of that utility will diminish, or their 
purchases of other utilities will diminish. If final 
purchasers are obliged to pay more dollars for all 
utilities, their purchases will diminish unless the 
dollars to their credit increase. If the dollars to 
their credit increase but the volume of production 
does not proportionately rise, they can obtain no 



170 THE FLOW OF VALUE 

more for the greater number of dollars than they 
formerly obtained with the smaller number of 
dollars. If higher wages as expressed in dollars 
be paid to part of the wage-earners and not to 
others, those wage-earners may be able to buy 
the same proportions of utilities as before, but 
other wage-earners will not be able to buy as much 
as they bought before. The only way in which 
all persons can receive utilities in greater propor- 
tions in return for the efforts put forth by them, 
is by the production of all utilities in greater pro- 
portion in relation to the number of persons en- 
gaged in their production. Then the tendency will 
be for the dollar of credit at a. given time to buy 
more of utilities than the dollar of credit at a 
preceding time. Thus with a fewer number of 
dollars can be obtained utilities that enable the 
application of force in the production of the same 
volume of utilities as before, or in the production 
of a greater volume of utilities than before. 

At any given time actual prices are determined 
by interrelations between force applied and wants 
met. They are likewise at any future time de- 
termined by these interrelations which may vary 
as follows: 

The volume in which a given utility is produced may in- 
crease in the same ratio as the population. 
This increase may be effected by the efforts of the same 
proportionate number of persons. 



THE RELATIVITY OF PRICES 171 

This increase may be effected by the efforts of a 
smaller proportionate number of persons. 

This increase may be effected by the efforts of a larger 
proportionate number of persons. 

The volume in which a given utility is produced may in- 
crease in a greater ratio than the population. 

This increase may be effected by the efforts of the 
same proportionate number of persons. 

This increase may be effected by the efforts of a smaller 
proportionate number of persons. 

This increase may be effected by the efforts of a larger 
proportionate number of persons. 

The volume in which a given utility is produced may 

decrease, or it may increase in a less ratio than the 

population. 
This volume may be produced by the efforts of the 

same proportionate number of persons. 
This volume may be produced by the efforts of a 

smaller proportionate number of persons. 
This volume may be produced by the efforts of a 

larger proportionate number of persons. 

The demand for a given utility may increase in the same 
ratio as the population. 

The demand for a given utility may increase in a 
greater ratio than the population. 

The demand for a given utility may decrease in relation 
to the population. 

If the increase in the volume of a given utility 
be in the same ratio as that of the population and 
if the production be effected by the same propor- 



173 THE FLOW OF VALUE 

tionate number of persons applied in the same 
relative proportions, and if the demand increase in 
the same ratio as that of the population, the price 
will not change. This would be because all of the 
factors that determine price would remain the 
same. 

If the increase in the production of a given util- 
ity and in the demand be in the same ratio as that 
of the population, and the production be e:ffected 
by the same proportionate number of persons, 
but there be a variation in the effectiveness of 
their respective efforts, the price would be the 
same, the aggregate of credits received by those 
responsible for production would be the same, but 
wage and profit would vary with the respective 
degrees of effectiveness of the producing organiza- 
tions. 

If the volume of production of a given utility 
increase in the same ratio as the population, and 
the demand increase in greater ratio, prices would 
rise and the aggregate of credits to those respon- 
sible for production would increase. This would 
mean that purchasers would have to decrease their 
purchases of other utilities unless the production 
of those utilities had so increased that because of 
the ensuing fall in prices purchasers could still 
pay higher prices for the given utility. 

If the volume of production of a given utility 
decrease in ratio to the population and the de- 
mand for it correspondingly decrease, prices will 



THE RELATIVITY OF PRICES 173 

remain the same, but the total of credits accruing 
to those responsible for its production will rela- 
tively diminish. 

If the volume of production relatively decrease 
and the demand relatively increase, prices wiU 
advance. They may possibly so advance that 
those responsible for production will receive 
greater credits than if the volume were greater 
in relation to the demand. If they do not have to 
pay higher wages, or more for substance, their 
profit will be greater. 

The demand for a given utility depends in part 
upon the relation which the proportionate in- 
crease or decrease in its production bears to the 
proportionate increase or decrease in the produc- 
tion of other utilities. For example, utility A 
may be wanted so much more than utility B that, 
even though the production of the former had rela- 
tively decreased and that of the latter relatively 
increased, many persons might be willing to pay 
the higher prices requisite to obtain utility A and 
thus could not afford to buy utility B even at 
lower prices. 

The preceding discussion has shown that, inas- 
much as all utilities are the result of human effort, 
price consists in the respective measure of utilities 
of respective kinds that can be obtained in ex- 
change for a given measure of human effort of a 
given kind, or for a measure of the results of 



174 THE FLOW OF VALUE 

respective proportions of human effort. As price 
is expressed in terms of the unit of exchange, the 
dollar measures utilities that are bought in terms 
of utilities that are sold. As the relation between 
utilities bought and utilities sold is that of supply 
and demand, the dollar is the nexus of supply and 
demand for effort applied in respective kinds of 
production. As there is thus a relativity between 
the proportions of effort applied in the production 
of utilities, there is also a relativity between 
prices. As, pursuant to supply and demand, 
greater or less proportions of the aggregate of 
productive effort are respectively applied in the 
production of the respective measures of the util- 
ities of the different kinds that have the ratio of 
the dollar, the changing relations between effort 
applied and wants met are indicated by changes 
in price expressed in terms of the dollar. 



ifc ,:J!:i 



XIII 

THE EELATIVITY OF PEOFIT 

The germ of profit is in the specialization of 
effort. The first gain was in that exchange where- 
nnder each party obtained that which was pro- 
duced with less effort than he wonld have been 
obliged to exert in its production. That, produced 
by each gave command over the results of effort 
of the other; there was mutual profit because of 
the mutual saving of effort. Continuity in attain- 
ing profit is continuity in producing that which 
through exchange gives command over a greater 
proportion of effort than that applied in its pro- 
duction. Thus profit develops into the production 
and selling of that which gives command over the 
results of the efforts of others, and therefore over 
the manner in which effort shall be put forth by 
others. In further development, profit is derived 
from selling utilities for prices that bring credits 
sufficient to give command over effort that results 
in the production of utilities that bring greater 
totals of credits, and thus, other things equal, com- 
mand over the efforts of a greater number of per- 
sons. In a still later development continuity of 
profit implies the selling of utilities, in the produc- 

175 



176 THE FLOW OF VALUE 

tion of which human effort has been applied in 
connection with external force, for prices that 
bring credits sufficient to give command over 
effort that, applied in connection with external 
force, results in the production of utilities that 
bring greater totals of credits. This may or may 
not involve enlisting the effort of a greater num- 
ber of persons, but profit tends to give command 
over the efforts of a greater number of persons 
than that of those from whose efforts it was de- 
rived. 

Profit is the surplus obtained from the sale of 
utilities over that which has been expended in 
their production. Therefore, it is the surplus re- 
ceived from the sale of utilities over what is neces- 
sary to replace that consumed in their produc- 
tion. Therefore, profit is that received from the 
sale of utilities which may be utilized in the pro- 
duction of utilities of the same kind in larger vol- 
ume, or in the production of utilities of another 
kind, or in the purchase of utilities of whatever 
kind. 

As profit is that portion of the credits derived 
from the sale of utilities which remains after pay- 
ment of the debits incurred in their production, 
all of profit is derived from the production and 
sale of utilities, and, therefore, from the sale of 
the results of effort that has been applied in the 
past. As profit more than suffices to replace that 
consumed we again perceive that it gives com- 



THE RELATIVITY OF PROFIT 177 

mand, other things equal, over a measure of effort 
to be applied in future production greater than 
the measure applied in the past from which it was 
derived. 

At any given time an aggregate of effort is 
applied in the production of the aggregate of util- 
ities that meet an aggregate of wants. As there 
is the relativity of effort applied in production, 
and relativity between the wants met, as inter- 
relations between effort applied and wants met 
determine prices between which there is relativity, 
it follows that there must be a relativity of profit. 
That is, the profit obtained from the production 
and sale of utilities of a given kind bears a rela- 
tion to the profit obtained from the production 
and sale of utilities of other kinds. Therefore, 
there is a relation between the profit derived from 
the production and sale of utilities of all kinds. 

Those responsible for production will, other 
things equal, pay wages determined by the sup- 
ply of and the demand for workers of the requi- 
site grades of efficiency. They -will pay for sub- 
stance, for instruments of production, and all 
requisite to their operation the prices determined 
by interrelations between supply and demand. 
These interrelations may determine prices for ef- 
fort or for substance that are higher or lower at 
one place than another, higher or lower at one 
time than another. A producer by availing of 
these variations may purchase to greater or less 



178 THE FLOW OF VALUE 

advantage than -another, and thus his profit may 
be larger or smaller. But inasmuch as bargaining 
and competition tend toward equal prices for equal 
measures of the same utilities, profit, in the long 
run, depends upon production at decreased cost 
in relation to the volume produced. This, other 
things equal, means that the efforts of fewer per- 
sons are enlisted in relation to the volume pro- 
duced. 

The total of profit obtained from the produc- 
tion of utilities of a given kind would be that of 
all producers of utilities of that kind. Obviously, 
the total of that production could not be increased 
unless profit could be obtained more than suffi- 
cient to replace all the utilities that were con- 
sumed. But, when the application of the effort 
for which a certain producer is responsible re- 
sults in the production of utilities which bring 
credits exceeding the debits incurred, that pro- 
ducer may continue to obtain profit from that vol- 
ume of production. He may be content to reap 
this measure of profit from this volume, leaving 
it to others to take the risks involved in increas- 
ing the volume. 

Profit is credits, and credits command over util- 
ities. When one producer obtains greater profit 
than another, he has secured greater command 
over utilities than another. As profit is expressed 
in dollars, a greater surplus of dollars acquired 
by one business organization as profit gives 



THE RELATIVITY OF PROFIT 179 

greater command over utilities than the smaller 
surplus acquired by another organization. 

Profit bears a relation to the expenditure which 
has been made in order to obtain it. That ex- 
penditure may be for human effort alone, as when 
a contract carpenter employs other carpenters. 
It may be for substance alone, as when a trader 
buys wheat for future sale. It may be for sources 
of substance, as when a dealer buys a farm for 
future sale. It may be for instruments of pro- 
duction bought by an intermediary for future sale. 
Or that expenditure may have been, as in the 
case of a large business organization, for sources 
of substance, substance, instruments of produc- 
tion, and effort, all of which are continuously util- 
ized in the production of utilities for sale. Thus 
profit may be secured upon the investment in a 
utility that is sold in its entirety, or it may accrue 
upon investment in various utilities continuously 
utilized in the production of utilities for sale. In 
either event profit is return upon investment. It, 
therefore, is calculated in relation to the total of 
the investment, and naturally is expressed in the 
percentage that the return bears to the invest- 
ment. 

Therefore, it is not sufficient to compare the 
total of profit obtained by one person or by one 
business organization with the total obtained by 
another. The significant comparison is of the re- 
lation of the profit to the investment. Upon a 



180 THE FLOW OF VALUE 

given investment, one business organization can 
not obtain greater profit than another unless it 
obtains a greater surplus of credits over debits. 
This it may do by producing at less expense per 
unit the same volume of utilities for which the 
same prices are received. On the supposition 
that equal prices have been paid for all that 
has been used in the production, profit will be ob- 
tained in greater measure by one organization 
than another if it be more efficient in the applica- 
tion of force. 

As it is the difference between the price received 
per unit of utility produced and the cost of pro- 
duction per unit that constitutes the profit per 
unit, it follows that the total of profit is the total 
of the profit from the total units of production. 
Therefore, profit is not to be measured solely as 
return upon the investment, but also is to be meas- 
ured in its relation to the volume of the produc- 
tion. If a plant be utilized to its full capacity, the 
profit per unit of production, other things equal, 
may be greater than if it is not so utilized. At 
times of extraordinary demand, if it be operated 
continuously day and night, its profit may be ex- 
traordinary. This will mean that it enlists more 
of effort and buys more of substance. As a pro- 
ducer does not enlist more of effort or buy more 
of substance unless he expects to obtain increased 
profit therefrom, it follows that he obtains profit 



THE RELATIVITY OF PROFIT 181 

not only upon the investment in the plant, but also 
upon the investment in wages and in substance. 

As individuals accumulate a surplus of credits 
over the debits expended for final utilities, they 
will have credit available for investment. They 
may utilize the surplus themselves in production 
from which they believe they will derive greater 
profit than from another line of production, or 
they may dispose of the right to the utilization of 
these credits to others who will seek to utilize 
them in that production from which they believe 
they can obtain the greater profit. Thus as cred- 
its accumulate, there will be investment in a given 
line of production until the profit obtained is no 
greater than that in another line of production, 
and thus there is the tendency toward the equal- 
ization of profit. This tendency operates, how- 
ever, only under similar conditions of risk. There 
are those willing to take great hazards in the hope 
of high profit, and others who will not make in- 
vestment unless the prospect of profit is more than 
probable, and thus may be content with a small 
percentage of return. 

Those who have the inclination and believe they 
have the capacity to obtain profit seek to assume 
the responsibility for the production and sale 
of utilities. If they have not a sufficient total of 
credits to enable the conduct of operations as ex- 



182 THE FLOW OF VALUE 

tensive as they desire, and believe they can ob- 
tain profit through the utilization of the credits 
of others, they are willing not only to assume 
the responsibility but to pay for the right to that 
utilization. 

He who has property in credits may be willing 
to entrust their utilization to another without se- 
curity in the belief that the probability of secur- 
ing profit is greater than that of incurring loss. 
He thus retains property in his credits but dis- 
poses of the right to their utilization. Or he may 
desire security that the amount of his credits in- 
vested be returned, and that he receive payment 
for the right to utilize them. In the latter case 
he exacts in return for the right to their utiliza- 
tion a definite promise of payment for that right, 
and of the return of the credits. He usually ex- 
acts in addition to the promise a pledge entitling 
him to take over property of the pledger in default 
of the return of the principal or in default of pay- 
ment for its use. He who makes investment in a 
business organization without assurance of re- 
turn shares in its proprietorship and therefore in 
its profit, which may be disbursed as dividends or 
may be retained by the organization as surplus. 
If he makes investment that is secured by the 
pledge of property, he does not share in the pro- 
prietorship. The payment which he receives for 
the right to the utilization of his credits is desig- 
nated a.s interest, that which is paid for their use. 



THE RELATIVITY OF PROFIT 183 

Investment in proprietorship not only accords the 
right to participate in profit, if profit be obtained, 
but it also imposes a share in the liability of the 
organization to its creditors. On the other hand, 
he who invests on security is himself a creditor of 
the organization. 

A total composed of the cre'dits of various per- 
sons in various proportions may be invested in a 
business organization in return for participation 
in its proprietorship, or upon pledge securing its 
repa^TXient and that of interest. The utilization 
of the combined credits of many persons under co- 
ordinated direction is most conspicuously exem- 
plified in the modern corporation. Investment in 
the proprietorship is evidenced by shares of stock, 
investment on pledged security by bonds. Those 
who hold stock are entitled to participate in what- 
ever profit may be obtained. Those who hold 
bonds are entitled to receive interest during the 
specified period, and the return of the principal 
at maturity. The issues of bonds of many large 
corporations are, however, refunded at maturity. 
That is, they are paid by a new issue, which may 
bear the same rate of interest, or may bear a dif- 
ferent rate of interest. Or they may be converted 
into stock, or paid in part. Interest on bonds 
may not be considered as paid from profit, but 
as payment fo.r credits utilized in production. 
To the extent that the replacement of that utilized 
in production depends upon the credits for the 



184 THE FLOW OF VALUE 

use ot which interest is paid, interest is an ex- 
pense of the business and not part of the profit 
of the business. It will, however, always be profit 
to the investor upon his investment. 

As a corporation utilizes human effort and 
cosmic force on a large scale in the transformation 
of substance, it can, if the application of force 
to matter is most efficiently directed, produce 
utilities in larger volume in relation to the effort 
applied than can a smaller business organization. 
Thus it can obtain greater profit whether meas- 
ured in the aggregate, or by percentage of return 
upon the investment, or in relation to the volume 
of production, at the same prices that are obtained 
by a smaller organization. Or it may obtain 
profit at diminishing prices which do not yield 
profit to a smaller organization. 

The large scale of the operations of a great cor- 
poration tends to provide opportunity for each 
person in its service to exercise his particular 
aptitude to the best advantage. The niost effec- 
tive coordination of the efforts of a greater num- 
ber of persons put forth in the respective ways in 
which they respectively have the greatest aptitude 
leads to the most efficient results. This and the 
use of structures, machines, and appliances that 
are respectively best adapted to their respective 
purposes leads to the production of the greatest 
volume of utilities in relation to the number of 
persons engaged in their production. Therefore, 



THE RELATIVITY OF PROFIT 185 

it is possible for utilities in greater proportions 
to flow to all persons engaged in production. 

When a corporation issues shares of stock or 
bonds in small denominations, it is possible for 
those who have accumulated only a small surplus 
of credit to invest it toward the attainment of 
profit or of interest. Therefore, it becomes pos- 
sible for an increasing number of persons to ac- 
cumulate credits which they may invest in the 
property or the bonds of a corporation. 

Inasmuch as it is possible for the corporation 
to obtain larger profit in proportion to the num- 
ber of persons engaged in production than if their 
etforts were exerted in smaller business organiza- 
tions in which there would be less efficient coordi- 
nation, the tendency is for the corporation to ob- 
tain larger profit in relation to the number of 
persons it employs. Therefore, as the tendency 
is for substance, sources of substance, and instru- 
ments of production to pass into the ownership of 
those who can obtain the greatest profit from their 
utilization, the tendency is for sources of sub- 
stance and instruments of production in increas- 
ing proportion to become the property of the cor- 
porations. Therefore, the tendency is for these 
resources and instruments to become the property 
of the increasing number of those who effectively 
exert their efforts, who do not spend for final 
utilities all they receive. And what is of still 
greater importance, they obtain a proprietary in- 



186 THE FLOW OF VALUE 

terest in the organized and effective application 
of force in production. This entitles them to par- 
ticipate in profit obtained if this application of 
force is effective, or compels them to participate 
i"n loss sustained if this application of force is in- 
effective. As the stocks and bonds of corpora- 
tions of established reputation can readily be 
bought and sold, there is the continuing tendency 
toward investment in the issues of those corpora- 
tions which continuously secure profit. 

As a corporation earns a greater or less per- 
centage of return as profit, the price of its shares 
of stock tends to be that upon which the rate of 
return is the same as upon the price which would 
have to be paid for the shares of stock in another 
corporation conducted under similar conditions of 
stability. Likewise the price of an established 
business tends to be that upon which the rate of 
profit will be the same as obtainable upon the 
price that would have to be paid for another busi- 
ness conducted under similar conditions of sta- 
bility. Thus this adjustment of the price for pro- 
prietary participation in or proprietorship of a 
business to the rate of profit is a manifestation of 
the tendency toward an equalization of profit. 

While the tendency is for the corporation to ob- 
tain a larger aggregate of profit, it does not al- 
ways secure a larger percentage of return upon 
the investment than was obtained upon its invest- 
ment by the smaller organization of the ante- 



THE RELATIVITY OF PROFIT 187 

cedent period. Competition developed the cor- 
poration which competed with the smaller business 
organizations, and competition has developed cor- 
porations that compete with corporations. Com- 
petition tends to reduce the rate of profit : it tends 
to the equalization of profit under equal risks. 



XIV 

THE INTEEEELATIONS OF EFFOET, PEICES, AND 

PEOFIT 

When it is said that the price of a given utility 
is higher than that of another, it may not be meant 
that, for the results of the application of a cer- 
tain measure of effort, more of other utilities can 
be obtained than for certain other results of the 
application of an equivalent measure of effort. 
No more may be meant than that it will require 
a greater number of dollars to buy a unit of a 
utility of one kind than a unit of a utility of an- 
other kind, regardless of the respective propor- 
tions of effort applied in their respective produc- 
tion. For example, if a suit of clothes is sold 
for fifteen dollars and a ton of coal for five dollars, 
it may be said that the price of the suit of clothes 
is higher than the price of the ton of coal. It 
may or may not have been that three times as 
much effort had been applied in producing that 
suit of clothes at a given time and place as had 
been applied in producing that ton of coal at that 
time and place. But certain it is that, other 
things equal, he who buys a suit of clothes at fif- 

188 



EFFORT, PRICES, AND PROFIT 189 

teen dollars renders compensation for all of the 
effort applied in its production, and profit to those 
responsible for the various stages of that produc- 
tion. It must be so also for all of the suits of 
clothes sold at fifteen dollars, emanating from a 
particular establishment. Likewise sufficient to- 
tals of credits must be received for all suits of 
clothes sold at fifteen dollars to afford compensa- 
tion for all of the effort applied in their produc- 
tion and, other things equal, to yield profit to 
those responsible for the various stages of their 
production. It must be so also with a ton of coal 
sold at five dollars, and for all tons of coal sold 
at five dollars. 

It may be that a business organization produc- 
ing clothes to be sold at fifteen dollars a suit also 
produces suits of clothes of other grades for sale 
at different prices, ranging perhaps frora twelve 
dollars to twenty-five dollars a suit. It may be 
that operators producing coal for sale at five dol- 
lars a ton also produce coal of different grades for 
■sale at prices ranging perhaps from three dollars 
to six dollars a ton. Therefore, the total of the 
credits received from the sale of all of the clothes 
at varying prices must be sufficient to reimburse 
those responsible for the various stages of their 
production, and, other things equal, to allow them 
profit. And likewise it must be with the credits 
derived from the sale of coal of the various grades. 
A sufficient number of persons must buy all of 



190 THE FLOW OF VALUE 

the clothes at the various prices yielding such a 
total of credits, and a sufficient number of per- 
sons must buy all of the coal at the various prices 
sufficient to yield such a total of credits. 

A modern organization conducting business on 
a large scale seeks to transform all of the sub- 
stance it produces into utilities of one kind or 
another in order that there may be no waste, and 
that it may thus receive the greatest total of cred- 
its. Thus an organization may produce utilities 
serving the same purpose that are sold at different 
prices, and utilities that serve other purposes which 
respectively are sold at varying prices. For ex- 
ample, the modern packing-house produces choice 
cuts of beef, which the retail dealer sells at higher 
prices than inferior cuts which, in turn, are sold 
at higher prices than soup bones. It produces 
soap in delicately scented cakes packed in dainty 
boxes which are sold at higher prices than soap 
perhaps of the same quality in bulky cakes that 
are packed by the gross without wrapping. It 
produces a great range of other utilities that are 
sold at a varying range of prices. The audience 
in a theater is composed of different groups who 
have paid different admissions for seats in the or- 
chestra, in the balcony, in the gallery; varying 
rates are charged by a railroad company for the 
transportation of freight of different kinds. The 
intent is always to receive credits move than suffi- 
cient to compensate for the effort applied in pro- 



EFFORT, PRICES, AND PROFIT 191 

duction. This end is attained in the case of many 
final utilities by their diffusion in such volume 
that large totals of credits are obtained from 
relatively small payments by great numbers of 
purchasers. Of such are the gas or electricity 
that provide light and heat for thousands of 
homes, from whose occupants are received the 
credits that in their totals are sufficient for the 
maintenance and operation of a plant that cost 
millions of dollars. Admissions of five cents and 
ten cents to moving pictures provide return 
that enables the expenditure of many thousands 
of dollars in the provision of one picture that 
is presented before many hundreds of audi- 
ences. 

In the production of clothes have been applied 
the efforts of a multitude of persons of various 
grades of effectiveness, and likewise in the pro- 
duction of coal have been applied the efforts of 
a multitude of persons of various grades of ef- 
fectiveness. Coal miners can not readily become 
tailors, nor can tailors readily apply their efforts 
in coal mining. But antecedent to the work of the 
tailors has been that of many on farms and in 
mills, a number of whom could qualify as coal 
miners ; and there are many in the coal mines who 
can do certain kinds of work on the farm and in 
the mill. There is a wide range of occupations, 
not requiring a high degree of specialization, in 
which there may be this exchangeability of effort. 



192 THE FLOW OF VALUE 

Such wage-earners may follow one employment or 
another as they can obtain higher wage. In occu- 
pations requiring a higher degree of specialized 
skill and training, shifting from one vocation to 
another is usually impracticable, unless there be 
the descent to an occupation that does not require 
such skill and training. This may happen when 
the supply of workmen in a given line of produc- 
tion exceeds for a considerable period the demand 
for the results of their efforts. But as higher 
wages are obtained in one vocation requiring spe- 
cialized skill and training than in another, a 
greater proportion of the coming generation will 
endeavor to fit themselves for that vocation. As 
the supply increases, the wage will tend to fall, 
and thus there is the tendency toward the equal- 
ization of wages for workers of similar degrees of 
skill and intelligence, not only in one vocation but 
in all vocations. Thus it is that even though the 
prices for one utility may be higher than those of 
another as expressed in dollars, there is the tend- 
ency toward the equalization of the wages paid for 
effort of similar effectiveness. 

If the profit secured by those responsible for a 
given kind of production be higher in relation to 
the investment than in another, or greater per unit 
of product, the tendency will be for accumulated 
credits to flow into that production. Farms can be 
devoted to the raising of crops of one kind or of 



EFFORT, PRICES, AND PROFIT 193 

another kind ; many instruments of production can 
be utilized in the production of utilities of one 
kind or another. The kind of crops that are so 
raised and of utilities that are so produced will 
tend to be determined by the degree of profit. It 
may be that highly specialized plants with struc- 
tures, machines, and appliances designed for a 
particular kind of production can not be shifted 
to other production. As such production yields 
high profit, the tendency will be for accumulated 
credits to be devoted to the construction of plants 
for similar purposes. If the profit is lower than 
can be obtained in other production, the tendency 
will be for accumulated credits to be devoted to 
other production. Thus there is the tendency to- 
ward the equalization of profit. 

There is a continual shifting in the relation 
between the numbers of persons employed in dif- 
ferent lines of production, in prices, and in profit. 
The tendency is ever toward equilibrium, just as 
the tendency of the flow of water is ever toward 
the level of the sea. But as the flow of the water 
toward that level is ever retarded, so also are the 
currents of industry and commerce deflected in 
their course toward industrial and commercial 
equilibrium. Equilibrium between the different 
kinds of production is slowly attained. A busi- 
ness organization may secure high profit at one 
time and low profit at another. It may endeavor 
to conceal high profit in order that competition 



194 THE FLOW OF VALUE 

may not be awakened. The wide diffusion of in- 
formation as to the receipts, expenditures, and 
profit of a modern corporation that makes com- 
plete periodical reports is a guide to investors 
who buy the stocks or bonds of one corporation 
or of another as profit is high or low, as there is 
prospect of ensuing prosperity or ensuing depres- 
sion in one line of production rather than in an- 
other. The tendency toward equilibrium is more 
manifest in the production of the great staple util- 
ities in which is utilized substance that exists or 
that may be produced in great abundance. For 
example, profit in the production and sale of bitu- 
minous coal which underlies vast areas of the 
United States is less than in that of anthracite 
coal, the deposits of which are limited. Higher 
profit is obtained from the utilization of instru- 
ments of production closely guarded by patents 
than through those that may be purchased and 
utilized by any one with the credits sufficient to 
pay for them. If a business organization, or 
organizations acting in concert, are able to obtain 
such prices as they may fix for the utilities they 
produce, they may so limit their volume as to 
obtain higher profit per unit of production than if 
they met the wants of a greater number of persons 
at a lower price. 

A change in the interrelations between supply 
and demand may so advance the prices of certain 
utilities that their producers will reap high profit. 



EFFORT, PRICES, AND PROFIT 195 

As profit is obtained from the sale of utilities pro- 
duced by the application of effort in the past, the 
tendency, in such a case, is for the high profit to 
be obtained before there is an advance in wages or 
in the prices for substance. As knowledge of the 
increasing profit comes to wage-earners, they are 
prompted to demand higher wages. 

If one employer advances wages for employees 
of a given grade of effectiveness, the tendency will 
be for other employers to be obliged to make sim- 
ilar advances. When there is increasing supply 
in relation to the demand, or diminishing demand 
in relation to the supply, prices tend to fall and 
profit to diminish. There is diminution of profit 
before employers seek to reduce wages, and reduc- 
tion is nearly always bitterly opposed by the em- 
ployees. If employers producing a given utility 
can not obtain profit at the wages they are obliged 
to pay, they will be driven out of the production 
of that utility. Before being driven out of pro- 
duction they will, if they can not reduce wages, 
endeavor so to advance the prices of the utilities 
they produce that they will obtain profit, or they 
will endeavor the further to increase the volume of 
production in relation to the number of persons 
employed so that they will secure profit even at 
lower prices. If they advance the price of utili- 
ties, other things equal, either their sale will di- 
minish, or the sale of other utilities will diminish. 

This will be the sequence of cause and effect if 



196 THE FLOW OF VALUE 

the employees whose wages are advanced are no 
more efficient in production than before the ad- 
vance ; that is, if no more than the same volume of 
utilities be produced in relation to the number of 
persons engaged in their production. If, however, 
coincident ally with the advance of wages there is 
such an increase in production that the same meas- 
ures of utilities can be obtained for the dollar, the 
purchasing power of a measure of human effort 
has increased in greater proportion than the 
prices of utilities have advanced. 

If the dollars received by employers are exactly 
equal to the dollars paid as wages — that is, all 
wages, including those paid for the production of 
substance — they can continue in production so 
long as their machines, structures, and appliances 
do not wear out. If the dollars received by em- 
ployers enable them no more than to pay wages 
and renew the machines, structures, and appli- 
ances, they can continue in the production of the 
same volume of utilities, but they will receive no 
profit wherewith to pay the wages requisite to en- 
list additional effort, provide additional substance, 
and additional machines, structures, and appli- 
ances wherewith to produce an increasing volume 
of utilities to meet the increasing wants of an 
increasing population. That is, they will not be 
able to provide the organization and instruments 
of production by means of which employment can 
be given to the increasing population and by 



EFFORT, PRICES, AND PROFIT 197 

means of which continually increasing wants can 
be met. 

Those who continue to produce utilities with the 
application of a decreasing proportion of effort 
will, other things equal, continue to obtain profit. 
So long as there is the demand for these utilities 
at prices that enable the less efficient to continue 
in their production, the more efficient will obtain 
greater profit. So long as the total of credit ob- 
tained from the production and sale of a given 
utility is larger in proportion to the effort applied 
in its production than the total obtained from the 
production and sale of another utility, will the 
profit be greater. It niay be that this relatively 
greater profit will enable the purchase of sources 
of substance, substance, or instruments of pro- 
duction, from the utilization of which profit is de- 
rived in smaller measure. Thus those who reap 
extraordinary profit from an extraordinary but 
temporary demand may make investment in an 
organization that secures smaller but continuing 
profit. 

Efficiency means an increased volume of pro- 
duction of a utility of given kind and quality in 
relation to the effort expended. The more effi- 
cient the production, the less is the number who 
have to be supported by the credits derived there- 
from. Therefore, whether the production of a 
given utility continue to fall in relation to demand 
or whether it continue to increase in relation to 



198 THE FLOW OF VALUE 

demand, the more efficient will be enabled to con- 
tinue in production longer than the less efficient. 

It is to be emphasized that credits which con- 
stitute profit are of no avail unless 

1. They are expended to jenlist effort in the pro- 
duction of an increased volunie of utilities of the 
same kind from which they were derived. It 
would be without avail to produce this increased 
volume unless there were the increased demand 
which would enable them to be sold at prices that 
would bring credits exceeding the debits ex- 
pended. 

2. They are expended to enlist effort in the pro- 
duction of utilities of another kind such as were 
already produced. If so, the volume of the pro- 
duction of these other utilities would be increased. 
They would not find sale at the price that would 
yield profit unless the volume of other producers 
were inadequate to meet the demand at prices 
which would yield profit, or unless they could be 
produced at less expense than that of other pro- 
ducers and, therefore, sold at lower prices which 
would yield profit, and at the same time tend to 
drive other and less efficient producers out of their 
production. 

3. They are expended to enlist effort in the pro- 
duction of utilities of other kinds such as would 
substitute utilities previously produced. If they 
were more desirable than the utilities they substi- 



EFFORT, PRICES, AND PROFIT 199 

tuted, it is not impossible that higher prices could 
be obtained for them. If they were neither more 
nor less desirable, they wonld tend to substitute 
the other utilities to the extent that the prices were 
less, 

4. They are expended to enlist effort in impart- 
ing that education and training to the coming gen- 
eration which tends to fit it for future usefulness. 
This includes the endowment of educational insti- 
tutions and contribution to their support. 

5. They are expended to enlist effort in research 
that may directly serve to eliminate disease, that 
may serve to make more efficient the production of 
utilities, or that may extend the range of knowl- 
edge. This includes the endowment and support 
of organizations so engaged. 

6. They are expended to enlist effort in the pro- 
motion of intellectual, esthetic, and moral eleva- 
tion. This includes the endowment and support 
of institutes of art, of music, and of museums. 

7. They are expended to enlist effort in the 
ministration of that charity which tends to build 
up the unfortunate, or to support the worthy in- 
digent. This includes the endowment and support 
of hospitals and asylums and contributions to ef- 
fective charitable organizations. 

8. They are expended to enlist effort in minis- 
tering to the ease and comfort of the possessor, or 
for the results of effort desired for personal grati- 
fication. 



200 THE FLOW OF VALUE 

If there were no profit, civilization would lose all 
that civilization means. There could not, for ex- 
ample, be provision for those who practise the 
professions and the arts unless there was a sur- 
plus of the essential utilities of food, clothing, and 
shelter over those consumed by the persons whose 
efforts are enlisted in their production. Large 
measures of profit, to be sure, are expended for 
personal gratification. This may be beneficial, or 
it may be deleterious. Deleterious expenditure 
tends to diminish as the diffusion of good judg- 
ment and good taste places it under the ban. 

As the coordination of the efforts of employer 
and employees, especially when applied in connec- 
tion with cosmic force, leads to the provision of 
things the community wants in greater volume 
and variety than would otherwise be provided, the 
quest for profit serves not only the selfish ends of 
those who seek gain but it serves an altruistic end 
for the benefit of the entire population. The com- 
munity enlists the efforts of employers in produc- 
tion through the hope of profit which they may or 
may not obtain. Employers enlist the efforts of 
employees by the payment of wages which, as a 
rule, the employees are certain to obtain. 

As all men seek to obtain the most they can for 
that with which they part, it follows that men will 
not dispose to employers of the right to utilize 
their efforts unless they can obtain more by so 



EFFORT, PRICES, AND PROFIT 201 

doing than by producing and selling utilities them- 
selves. Therefore, the desire for profit on the part 
of those who employ workers for wage leads to an 
altruistic end in that wage-earners obtain more in 
return for their efforts than they otherwise could. 
Thus not only do employers employ wage-earners 
with the intent of utilizing their efforts toward the 
acquirement of profit, but wage-earners employ 
their employers as instrumentalities toward a bet- 
ter living than they could make for themselves. 

As the human race has multiplied more rapidly 
than intelligence has diffused, by far the larger 
proportion of men now living are those whose ca- 
pacity for production is limited to that applica- 
tion of effort in which is not required a high de- 
gree of intelligence. The number of such men 
who will be given employment at a given time will 
depend upon the measure of effort that employers 
deem requisite in their production of future utili- 
ties. Employers pay for the force they need. If 
they require human effort only occasionally, they 
will employ men sporadically, or temporarily, by 
the hour or the day. In order that they may do 
this, there must be a supply of men willing to ac- 
cept such employment. In nearly every commu- 
nity are those who make a living by doing odd jobs, 
or by regularly dividing their efforts among a 
number of employers. 

The first and foremost utility is food. No mat- 
ter how great and varied the volume of utilities in 



W2 THE FLOW OF VALUE 

which a man may have property, he must have 
food. If there could be a situation so extreme 
that he would be obliged to part with all of his 
possessions in exchange for the food necessary to 
maintain his existence, it would be a choice be- 
tween that exchange and death. If a man have 
property in no utilities that can be exchanged for 
food or used in the production of food, he is 
obliged to put forth his efforts in behalf of an 
employer in exchange for food. Such men will not 
find employment, as a rule, unless the results of 
their effort are more desired by an employer than 
the wage which enables food to be obtained. 

Clothing is essential to civilized existence, but 
it does not have to be renewed from day to day as 
does food. Shelter likewise is essential to civil- 
ized existence, but mere existence can be main- 
tained without it. There are usually a number of 
wanderers — the tramps of this country — ^who do 
odd jobs when 'they must to obtain food, now and 
then work perhaps for several days at a time when 
necessary to replenish their clothing, but who sleep 
in the open or in such temporary shelter as they 
can appropriate. They drift between mine, farm, 
and lumber camp, sometimes working on railroad 
gradings and in the excavations for buildings. 
They find temporary employment at one place or 
another, largely because there are phases of pro- 
duction that necessarily depend upon the seasons. 
For example, there is a greater demand for men 



EFFORT, PRICES, AND PROFIT 203 

on the farms, in the mines, and in the building 
trades at one time of the year than at another. 
There are certain kinds of production that are 
seasonal because the demand varies from season 
to season. 

But the great body of wage-earners live in fixed 
habitations for considerable periods, working 
steadily, usually at specialized tasks, when they 
have steady employment. They must have the 
essential utilities coincidentally, and they must 
have them continuously. They can not devote all 
of their wages to the procurement of any one es- 
sential, to the exclusion of the others. Therefore, 
their wages must be paid continuously, and they 
must be sufficient to enable them to obtain at least 
the utilities essential to maintain them in condi- 
tion to put forth the effort of which they are ca- 
pable. This is of advantage to the employer as 
well as to the employee. It is to the advantage of 
both that there be the utmost attainable continuity 
of employment. And it is of advantage to the 
whole community; for the greater the proportion 
of the employed, the greater is the volume of 
utilities produced, and the less is the proportion 
of those w^ho must be supported without re- 
turn. 

Those who put forth effort may be grouped in 
tiers as of a pyramid. At the bottom are those 
who put forth crude, physical effort. The next 
and a shorter tier is composed of those who put 



204 THE FLOW OF VALUE 

forth skilled effort. Above that is a still shorter 
tier of those who put forth highly skilled effort. 
Above that is the still shorter tier of those who 
guide and direct the application of the efforts of 
others. At the top is the shortest tier, of those 
who design and conceive, direct and manage. 

If those putting forth crude, physical effort, 
who, for example, receive as wage two dollars a 
day, were advanced to three dollars without there 
being any change in the volume of production, and 
the dollars obtained by the individuals of the other 
groups remained unchanged, obviously the crude, 
physical workers could obtain, for a time, a 
greater proportion of utilities. Likewise, if those 
putting forth skilled effort who had received three 
dollars a day were suddenly advanced to four dol- 
'lars or five dollars, they would be enabled for a 
time to obtain a greater proportion of utilities. 
If crude, physical laborers were advanced from 
two dollars to three dollars and skilled workers 
continued to receive three dollars a day, not so 
many skilled workers would find employment be- 
cause of the necessity of employers to pay in- 
creased wages to the unskilled workers. Thus the 
number of workers competing for employment at 
three dollars a day would be increased. But em- 
ployers would employ no more of them than re- 
quired in their production, and, therefore, a 
smaller proportion of unskilled workers would 
find employment. Moreover, inasmuch as employ- 



EFFORT, PRICES, AND PROFIT 205 

ers would be obliged to pay three dollars to the 
unskilled laborers to whom they had only paid 
two before, they would be obliged to expend more 
dollars in production. The result would be that 
there would be less profit available for future pro- 
duction, or else the utilities produced would have 
to be sold for higher prices. Therefore, other 
things equal, the groups whose wages remained 
unchanged could obtain not only a smaller pro- 
portion of final utilities at a given time, but a still 
smaller proportion in the future. It is obvious 
that this result would be augmented, if coinci- 
dentally with the increase in wages there were a 
decrease in the productivity of each worker. 

Here it is to be emphasized that, as a rule, it is 
the large supply of crude, physical laborers in 
relation to the demand for such effort as they can 
put forth that causes their wages to be of the low- 
est. It sometimes is that a change in the inter- 
relations between supply and demand causes their 
wages to be at a higher rate than of those of more 
developed intelligence. For example, at times of 
harvest the demand for farm laborers is often so 
great that they command wages higher than are 
obtained by many school teachers, and many kinds 
of clerks. The system of education generally fos- 
tered throughout many decades in the United 
States has tended to give both sexes the knowledge 
that may be utilized in teaching school, without 
qualifying theni for putting forth their efforts in 



W6 THE FLOW OF VALUE 

other ways. Moreover, many so equipped engage 
in teaching while preparing for other pursuits. 
Thus the supply of school teachers has ever tended 
to be large in relation to the demand, and their 
wages to be low. For similar reasons, the supply 
of those competent to do routine clerical work has 
tended to be large in relation to the demand, and 
their wages to be low. The education which aids 
toward the attainment of the higher wage is not 
that which does no more than to cultivate a taste 
for literature and the refinements of living, but 
that which fits for the kinds of productivity for 
which there is the greater demand. 

When we say that in return for effort put forth 
at his behest an employer must render to an em- 
ployee at least the utilities necessary to the main- 
tenance of his existence during the period of his 
employment, we express what literally happens in 
the case of certain corporations such as those en- 
gaged in mining and lumbering, whose operations 
usually are conducted at places remote from com- 
munities engaged in other pursuits. The com- 
pany owns the house for which the miners pay 
rent ; it owns the stores from which the miners ob- 
tain food, clothing, and many other supplies. The 
company employs the physician who ministers to 
the employees and their families, and frequently 
arranges for theatrical performances and other 
forms of recreation. The wages of the employees 



EFFORT, PRICES, AND PROFIT 207 

are computed in dollars. Their rent and their 
purchases at the company stores and their avail 
of other utilities provided by the company are 
computed in dollars. At the end of the pay pe- 
riod, usually a fortnight or a month, the wages of 
the employee measured by dollars are balanced 
against his purchases measured by dollars. There 
has been demand on the part of the company for 
the services of the employee, and there has been 
demand on the part of the employee for the utili- 
ties received as wages. The employer has ex- 
pended of his credits for final utilities which he 
pays the employees as wages. Generally, how- 
ever, the processes of production and exchange 
are so specialized that an employer is continuously 
in possession only of the utilities used in his busi- 
ness. The wages paid to his employees are com- 
puted in dollars and are paid to them in dollars. 
In exchange for dollars, they receive the utilities 
they desire at the stores of retail dealers, and they 
pay to the landlord the rent for their habitation in 
dollars. The employer transfers to his employees 
as wages the credits with which they buy final 
utilities. 

Profit may be obtainable not only by an em- 
ployer who enlists the efforts of employees, but 
by an individual who puts forth his individual 
efforts in the production of utilities for which he 
receives more than sufficient to enable the replace- 



208 THE FLOW OF VALUE 

ment of that used and consumed. He uses and 
consumes food, clothing, and shelter. Their re- 
placement, in that it maintains his vitality, is in a 
sense the replacement of the force he has applied. 
If he has utilized substance, it also must be re- 
placed. That is, he must replace the force and 
he must replace the matter. If he is able to do 
more than this, he has obtained that which in es- 
sence is profit, which may continue to increase 
until his individual effort is no longer adequate. 
As his profit increases, he may become an em- 
ployer himself, or he may dispose to others of the 
right to utilize his accumulation and continue in 
the production limited by the application of his 
individual effort. 

So also with one who works for wage. If the 
wage is more than sufficient to buy the final utili- 
ties for the use and consumption of himself and 
those dependent upon him, he may engage in indi- 
vidual production or may become an employer. 
Thus, whether a man work for himself or work 
for an employer, it may be possible for him to 
accumulate credits which can be utilized in increas- 
ing production. Therefore, credits accumulated 
through saving are akin to profit. 

As profit is obtained by the production of things 
that people want and for which they are willing 
to pay more than sufficient to make the replace- 
ment, it is the wants of the population which deter- 
mine the kinds of production that will be engaged 



EFFORT, PRICES, AND PROFIT 209 

in by those seeking profit. Therefore, in the last 
analysis it is the wants of the population which 
determine the manner in which human effort shall 
be put forth, which determine the respective pro- 
portions of the population whose efforts are en- 
listed in respective kinds of production. Those 
who assume the responsibility of production are 
intermediaries who seek to interpret the wants of 
the population and to obtain profit by directing 
human effort in the channels through which these 
wants are met. Those who are successful in thus 
interpreting the wants of the population and in 
meeting those wants continue to be responsible 
for production. They continue to give employ- 
ment to those who have not the capacity for such 
interpretation and achievement. Because of 
changes in the interrelations between supply and 
demand, the prices of certain utilities may rise and 
the prices of other utilities may fall. Wages may 
vary, prices may fluctuate, and profit may rise and 
fall, but effort must be put forth continually that 
wants continually may be met. Therefore, it is 
that the great body of the population continually 
find employment to a greater or less degree, and 
their wants are continually met in greater or less 
degree. Effective producers continually find mar- 
ket for their products at a profit; efficient em- 
ployees continually find employment. An indus- 
trial cataclysm may, however, cause a profound 
modification in these relations. 



210 THE FLOW OF VALUE 

Any social or political entity, a town, a city, a 
nation, continues under the same designation, al- 
though the individuals change and the relations 
between the individuals within that community 
change. The community may grow or decline, it 
may have a low rate of mortality at one time and 
suffer the blight of disease at another. There is 
rotation in elective and appointive office. Wage- 
earners may become employers, and employers 
may become wage-earners. Families may pros- 
per, or may disintegrate. Members of a commu- 
nity may depart from it, and those of other com- 
munities may come into it. Friendships may 
strengthen and may dissolve. The name by which 
that community continues to be known may desig- 
nate a totally different group of individuals from 
one generation to another, and the characteristic 
traits of that community may utterly change in 
the course of time. 

It is so also with the human being. From birth 
to death a name attaches to each person, but there 
is unceasing change in the constituent parts of 
blood, bone, and sinew, in the matter of the nerves 
and the brain. By the action and reaction of the 
vital forces, nourishment flows in proportions to 
the different organs. Abundance of nutrition 
tends to fullness of form, impairment to wasting 
away, but so long as there is life the body is that 
of the person who bears the name that is a con- 
tinuing designation. When it is said that the 



EFFORT, PRICES, AND PROFIT 211 

body is that of the person, there is the implica- 
tion that the body is not all that constitutes a 
person. But the mind and the soul can not have 
manifestation unless there is the nurture of the 
body. 

All of production, of buying and selling, all of 
that which constitutes the economic functions of 
the social organism are akin to the absorption by 
the body, the transformation of food into the nour- 
ishing material that flows to its different parts and 
enters into their structure. As there is the inter- 
working of the activity of the various organs in 
the activity of the individual organism, so also is- 
there the interworking of the economic functions 
in the activity of the social organization. The 
transformation of the elements that enter into nu- 
trition and their flow to the various organs is 
determined by the vital processes that are beyond 
human knowledge. The gathering and extracting 
of substance from earth and air and sea, its trans- 
formation into utilities that meet human wants, 
and the apportionment of these utilities among 
humankind are in obedience to a force as myste- 
rious as that which dominates the vital processes, 
but its manifestation is in activity directed by the 
mind of man. That which in the realm of his 
conscious activity takes the place of the impalpa- 
ble force that balances and compensates the flow 
of nourishment to the organs of the body, is the 
dollar. The dollar is an expression of relations 



212 THE FLOW OF VALUE 

that may change from day to day in ways similar 
to that in which the body changes from day to day. 
But the changes in the social organization when 
in a state of health can no more be abrupt and 
turbulent from day to day, than can the changes in 
the body in a state of health be violent from day 
to day. 

The radical changes in the body during a life- 
time, and the radical changes in the social organ- 
ization throughout long periods, are more analo- 
gous to those that have taken place in living beings 
as life has evolved. The lowest type of animate 
existence is simple in form and simple in function, 
and so also is the early economic structure and 
function. The highest forms of living beings are 
exceedingly complex in structure, with functions 
marvelously intricate, varied, and interwoven, and 
so also is the developed economic organization. 



XV 

THE FLOW OF DEBITS AND CEEDITS 

With the passing instant the present merges 
into the past: with the coming instant the future 
presses on the present. The dollar received has 
been obtained by the sale of utilities produced in 
the past : the dollar expended is for utilities to be 
used in the future. Final utilities are the result 
of effort applied in the past. At the time of pur- 
chase they are bought to serve the purpose of the 
individual, it may be in the succeeding instant or 
it may be in time to'come. When there is transfer 
of property in sources of substance, substance, 
instruments of production, or intermediate utili- 
ties, they are bought for utilization in that future 
which comes with the passing hours or in the fu- 
ture more remote. Thus credit is derived from 
the past, and debit is incurred for the future. As 
for every sale there must be a credit, and for every 
purchase there must be a debit; and as there can 
not be a sale without a purchase or a purchase 
without a sale, the chain of credits and debits, the 
flow of debits and credits, is continuous. 

When a final utility in the form of food is pur- 
chased by the consumer, there is credit to the 

213 



214 THE FLOW OF VALUE 

seller and debit to the buyer, but there is no sale 
of that food to give rise to offsetting credit to its 
buyer. Food has served its purpose when con- 
sumed by the individual. It is likewise with cloth- 
ing as it is worn. If shelter be obtained by pay- 
ment of rent, it is likewise with shelter. Debits so 
incurred for the final utilities of food, clothing, and 
shelter contribute to the maintenance of the vital- 
ity of the individual, from which emanates effort 
that may be applied in that production which gives 
rise to credits in the future. It is likewise with 
other ministration to the wants of the body, or 
ministration to the emotions, or to the intellect, 
that is consumed as it is rendered. For example, 
fee to physician, admission to concert or play, 
give rise to debits to the account of those who 
pay them. Such services may be of benefit in pro- 
moting physical activity, or in giving moral or 
intellectual stimulus, that conduces to the attain- 
ment of credits in the future, or they may not. 
The debits that have been incurred in the purchase 
of such final utilities become credits to purveyors 
of food and clothing, to physician, musician, and 
actor. The purveyors of food must replace the 
stocks they have sold. Physician, musician, and 
actor must maintain the vitality that enables them 
to continue in their ministration. At the time of 
death the productivity of the individual ceases. 
If it cease before death, he will be obliged to sus- 
tain the remainder of his life by the expenditure 



THE FLOW OF DEBITS AND CREDITS 215 

of accumulated savings, or from rentals, if he have 
acquired property yielding rent, or from other 
investments that he may have made. Or else he 
will become dependent upon others for that sup- 
port for which he renders no economic return. 

While all of effort applied in production is ap- 
plied toward the production of final utilities that 
are used and consumed by the individual, a large 
proportion is exerted in the provision and utiliza- 
tion of utilities not immediately consumed by the 
individual. The less the proportion of effort im- 
mediately devoted to the production of the final 
utilities that are consumed by the individual, the 
greater is the proportion that may be devoted to 
the provision of sources of substance and instru- 
ments of production that tend to accumulate for 
utilization in the production of final utilities in 
greater volume to meet a greater volume of wants. 
Therefore, were every credit of the final purchaser 
transmuted into the debits for final utilities that 
minister to the vitality from which emanates force 
applied in further production, it would be that, in 
the endless transmutation, credits would ever give 
rise to debits that in turn would give rise to cred- 
its, augmenting both in the aggregate and in rela- 
tion to the population. That the tendency of all 
production is toward such an augmentation is 
manifested by interest, which is based on the prac- 
ticability of the debits into which credits are con- 
verted being utilized in the attainment of a greater 



216 THE FLOW OF VALUE 

total of credits. The rate of interest in general 
is based on the belief that there is a certain ratio 
of such augmentation, and the rate of interest in 
particular upon the degree of probability of the 
particular ratio of such augmentation. Further 
evidence of this tendency is afforded by all invest- 
ment toward the attainment of dividends, of profit. 

If every person always received for the results 
of his effort a return equivalent to that received by 
any other person for putting forth effort of the 
same degree of effectiveness, the whole community 
would be paying to each person for a given meas- 
ure of the results of effort that which it would 
have to pay to another for an equivalent measure 
of the results of effort. Each person would obtain 
the same command over utilities as any other per- 
son contributing to production in the same meas- 
ure. 

Therefore it would be that, if for the results of 
effort for which he was responsible one person re- 
ceived greater command over utilities than an- 
other, it would be because such results of effort 
could not be obtained for less. The person re- 
ceiving the greater return would have been more 
effective in meeting the wants of others. 

Therefore it would be that he who received 
larger command over utilities than another would 
not be depriving that other either by receiving or 
expending his larger command ; that is, his greater 



THE FLOW OF DEBITS AND CREDITS 217 

credit. If he buy final utilities in the full measure 
that meets his wants and pay no lower price for 
them than others pay, he is depriving no one of 
employment, no one of that in which he has prop- 
erty. On the contrary, he is incurring his share 
of the debits that enable the continuing production 
of these utilities. 

Therefore, if those whose; credits exceed their 
wants for final utilities place the surplus in the 
way of that utilization which conduces to an in- 
crea'sing production of utilities of general useful- 
ness, they are not only not depriving others, but 
are affording means for the employment of others. 
Thus those who invest their credits in return for 
interest or in the hope of dividends are rendering 
a benefit to their fellowmen. Likewise those who 
obtain the utilization of credits in return for which 
they pledge interest or the right to participate in 
profit, are conferring a benefit by the production 
of utilities. That benefit receives recognition if 
from the sale of utilities thus produced there is 
obtained profit. If from the utilities produced the 
credits received are not equal to the debits in- 
curred, there has been overproduction, credits are 
annihilated. 

Moreover, when a man expends surplus credit 
thus obtained for a final utility that affords per- 
sonal gratification, he is not depriving others. If, 
for example, he purchases for one thousand dol- 
lars a rare painting by an artist, who perhaps long 



218 THE FLOW OF VALUE 

ago passed from the- living, and makes immediate 
payment with a check on a bank, utilities produced 
and sold in the past have provided the credit 
against which he draws. He takes the painting 
into his house, where it continues to afford grati- 
fication so long as he retains it. What relation in 
the flow of debits and credits does the purchase 
and sale of that painting have to human effort put 
forth in the production of utilities ? The buyer was 
entitled to spend his credits as he might desire. 
Inasmuch as he expended them for the painting, 
it is fair to assume that he did not deprive himself 
of food, clothing, or shelter and, therefore, did 
not diminish the demand for these essential utili- 
ties, or deprive men of employment in their pro- 
duction. If the picture were purchased from one 
in need, who expended the one thousand dollars 
for essential utilities, the results of past effort 
may have helped to tide an unfortunate over a 
period of adversity, or they may have served to 
prolong the existence of one who had outlived his 
usefulness, and thus have provided a market for 
essential utilities. 

If the one thousand dollars were paid to an art 
dealer, it contributed to the return from his busi- 
ness which supported himself and his family, and 
enabled him to purchase other pictures; that is, 
to replace the utility which was sold. The results 
of past effort contributed to the d^^mand for the 
work of painters, to the maintenance of the art- 



THE FLOW OF DEBITS AND CREDITS 219 

rooms where their pictures would come to the eye 
of prospective purchasers. Pictures would not 
be purchased except by those whose demand for 
essential utilities had been supplied. 

If the one thousand dollars were received by one 
who no longer desired the painting, and were in- 
vested by him in shares of stock in a corporation, 
would not the effect upon the flow of debits and 
credits be the same as though the purchaser had 
made that investment himself? In either event, 
credit derived from the production and sale of 
utilities in the past would have been transmuted 
into the debits incurred in the purchase of the 
shares of stock. In either event, the seller of the 
shares of stock would have received the one thou- 
sand dollars. The effect upon the further produc- 
tion of utilities would depend upon the disposition 
made by him of that credit. If the seller of the 
picture, or of the shares of stock, invested the 
one thousand dollars in extending business opera- 
tions, or in a new business organization, the results 
of past efforts exchanged for the picture would 
contribute to the production of future utilities for 
which there might or might not be a compensatory 
demand. 

In the actual progress of the human race the 
tendency has been toward the transmutation of 
credits into debits that result in the augmentation 
of credits. This tendency has been conspicuous 



£20 THE FLOW OF VALUE 

throughout the era between the introduction of 
steam and the beginning of the World War. That 
progress has been interrupted and retarded by 
the weaknesses of human nature — by what we 
designate as folly, ignorance, stupidity, greed, and 
vice. It has been interrupted and retarded by 
famine, disease, conflagration, and seismic dis- 
turbance. It has been interrupted and retarded 
by war. These causes have impaired the working 
of the principles disclosed by the analysis of the 
preceding chapters. 

There has been despoliation by theft, and there 
has been despoliation through subtler processes 
within the law. Bargaining has not always re- 
sulted in mutual benefit to buyer and seller. The 
more astute, the crafty, and the unscrupulous have 
ever sought to obtain undue advantage, and often 
have succeeded. Therefore, it is not true that the 
lowest price for which a utility could be obtained 
has always been the lowest price paid for it; and 
it has not always been that equal wages have been 
paid for effort of equal effectiveness. The lack of 
perception that the greatest benefit to all persons 
is secured by the production of the largest volume 
of utilities in relation to the number of persons 
engaged has seriously impeded material progress. 
There has been organized and widespread effort 
to limit the productivity of wage-earners, to pre- 
vent the more efficient from contributing to pro- 
duction in greater degree than the less efficient. 



THE FLOW OF DEBITS AND CREDITS 221 

It has not been true that final utilities have always 
contributed to the maintenance of that vitality 
which finds expression in the most effective pro- 
duction of which the individual is capable. On the 
contrary, the demand for many kinds of stimu- 
lants and other deleterious utilities has resulted 
in the impairment of the efforts of their purchas- 
ers. Debits incurred in their purchase have been 
converted into credits to their producers, but these 
debits have weakened the ability of the purchasers 
to obtain further credits. 

The current of debits and credits toward a con- 
tinual augmentation of credits in relation to the 
population has been seriously impaired by over- 
production and underproduction. If the produc- 
tion of a given utility so increases that prices can 
not be obtained which bring the total of credits 
that enables producers to continue in its produc- 
tion, there has been overproduction of that utility. 
Obversely, if the supply of a given utility be less 
than the volume for which credits could be ob- 
tained sufficient to enlist the effort required in 
the production of that volume, there has been 
underproduction of that utility. When there has 
been underproduction, there has been unemploy- 
ment or else a deficient application of effort in the 
production of certain utilities, and an excessive 
application in the production of others. Thus the 
underproduction of certain utilities is often, if not 
always, coincident and correlative with the over- 



223 THE FLOW OF VALUE 

production of others. Overproduction means tliat 
the credits converted into the debits incurred in 
production have been annihilated in tliat they have 
not given rise to equivalent credits. 

The remedy for these defects would seem to lie 
in the diffusion of intelligence, of knowledge, and 
of that which w^e designate as honesty. Probably 
there is no more efficacious antidote for dishonesty 
than the knowledge which leads to the perception 
that each obtains the greatest benefit for himself in 
putting forth his efforts toward the greatest ben- 
efit of others, and the intelligence which leads to 
his obtaining in return payment at least as high as 
would have to be accorded another for efforts of 
equal effectiveness. The diffusion of the percep- 
tion that a man ought to contribute to the utmost 
of his capacity to the benefit of others tends to 
the elimination of indulgence in deleterious utili- 
ties. 

Overproduction also has its roots in ignorance, 
which can only be corrected by the wider knowl- 
edge which would lead to the better estimate of 
the demand for utilities of the various kinds, and 
to the better adjustment of the application of ef- 
fort in their production. This will be possible 
only through a wider coordination of the various 
processes of production than could be attained 
under the era of unrestrained competition, when 
each producer adhered to secrecy and strove en- 
tirely for immediate gain. Such shortsightedness 



THE FLOW OF DEBITS AND CREDITS 223 

on the part of many competitors is certain to re- 
sult in overreaching, which leads to loss by all. 

Through that coordination which finds expres- 
sion in insurance is mitigated the baleful effect of 
the destruction of credits due to seismic disturb- 
ance and conflagration. Portions of the credits 
in the possession of various persons are combined 
in a total of credit which may be invested in the 
attainment of profit or interest. From the total of 
credit thus obtained and the profit accruing from 
its utilization the insurer is reimbursed for his 
losses. Thus, when from such causes the wide- 
spread destruction of credits ensues, there is a 
diminution of the aggregate of credit in existence, 
but the loss does not fall in its entirety upon the 
insured whose property has been destroyed. 

It is obvious that the greater the proportion of 
the population not engaged in the production of 
utilities, the greater is the number who must be 
supported by those who are so engaged. In time 
of war there is a decrease in the number of those 
who put forth effort in production, with the 
result that those not under arms must produce 
the utilities that maintain the existence of those 
who are immediately engaged in warfare, as well 
as of those who are not. Moreover, their effort 
must be applied not only in the production of the 
utilities that sustain the vitality of combatants and 
noncombatants, but in the production of imple- 



224 THE FLOW OF VALUE 

ments and munitions of war. For the debits in- 
curred in the production of implements and muni- 
tions of war no credits are received by their pur- 
chasers. The debits incurred in the production of 
utilities for the use of men under arms maintain 
vitality from which emanates effort applied dur- 
ing the conflict in destroying, not in producing, 
credits. The debits incurred in the production of 
utilities for the consumption of the men who are 
killed bring no offsetting credits. Lives from 
which there might have been the continual emana- 
tion of productive effort are brought to a close. 

The war that began in 1914 had not been in prog- 
ress many months before the United States was 
called upon for vast supplies of food, clothing, 
arms, and munitions for the Allies. The effort of 
men was needed as never before ; sources of sub- 
stance and instruments of production were 
strained as never before. Payment was made 
from the accumulated resources of the Allies; 
stocks and bonds entitling their citizens to par- 
ticipation in the profit attained by industrial and 
commercial organizations in the United States 
were pledged for the credits against which they in- 
curred debits for their supplies. Thus credits ob- 
tained from past production were expended for the 
production of utilities that would not be utilized 
in producing credits but would be destroyed. To 
obtain further credits, the Allied nations borrowed 
not only of the credits of their own people but also 



THE FLOW OF DEBITS AND CREDITS 225 

of the government and the people of the United 
States, thus pledging credits to be obtained from 
the production in the future. 

The rising demand brought high prices. The 
farmers of the United States obtained extraordi- 
nary prices for their crops; workmen obtained 
hig'h wages, and those responsible for production 
high profit. Abounding prosperity came to the 
United States because the efforts of a great pro- 
portion of the population were being put forth in 
the production of that which the Allies must have 
at any price. There came an extraordinary de- 
mand for food for the belligerents and for the sub- 
stances transformable into powder, into projec- 
tiles, into rifles, into ordnance, into shoes and cloth- 
ing for the use of their soldiers. To secure the 
workmen requisite to the increased production, 
factories offered higher wages that would attract 
them from other employment. Thus many thou- 
sands of men received a greater number of dollars 
as wages. Manufacturers were obliged to pay a 
greater number of dollars for steel, copper, cotton, 
wool, and for coal, the primary essential of all 
manufacturing. The operators of mines had to 
pay a great number of dollars as wages, a greater 
number of dollars had to be paid for cotton and 
for wool. The increasing export of foodstuffs 
compelled the payment to the farmers of a greater 
number of dollars for grain, for meat. A greater 
number of dollars were paid for automobiles, for 



2^6 THE FLOW OF VALUE 

horses and mules. Debits incurred by manufac- 
turers and exporters were compensated by credits 
rising from payment by the Allies. But the debits 
incurred by the Allies were not for purchases to be 
utilized in the production of utilities that would 
result in further credits. They were for utilities 
to be used in the killing of men by men who them- 
selves were killed. Their credits were being an- 
nihilated. 

The credits obtained by the manufacturers and 
exporters of the United States, and diffused by 
them, placed dollars in greater number to the 
credit of miners, farmers, and wage-earners in 
many vocations, enabling them to obtain final utili- 
ties in greater volume and variety than ever be- 
fore. Those not engaged in the production of 
utilities for the combatants and whose credits did 
not increase, found their command over utilities 
diminishing. As they were obliged to pay more 
for the essential utilities, they were compelled to 
restrict their purchases of the less essential. 

Then the United States entered the war. Our 
armies were recruited from the young and vigor- 
ous, many of whom had not entered upon the pro- 
ductive exercise of their effort. In great propor- 
tion, however, they were from the productive 
ranks. These, together with the vast number of 
the subjects of foreign nations who had returned 
at the beginning of the war to join the armies of 
the countries to which they owed allegiance, caused 



THE FLOW OF DEBITS AND CREDITS 2^7 

a tremendous decrease in the productive effort of 
the United States. This was coincident with a 
tremendous increase in the demand for human 
effort in providing supplies, not only for the 
armies of the Allies but for the armies of the 
United States, in constructing camps, in transpor- 
tation by rail, and in constructing ships. As the 
energies of thousands of men were withdrawn 
from that production which would give rise to 
credits, there were required the efforts of the 
smaller population that remained to supply not 
only its wants but the wants of all immediately 
engaged in the war. 

The Government of the United States became 
the greatest purchaser of the utilities produced in 
the United States. Credits to offset the debits 
incurred by the producers of these utilities were 
supplied by the government. With exceptions 
that were negligible before the war, the govern- 
ment does not engage in the production of utili- 
ties for sale. Its utilization of credits in the 
main is in providing that security of person 
and of property which enables the citizen to con- 
tinue in production, in buying and selling. It 
does not transmute debits into credits. The 
credits utilized for governmental expenditures are 
drawn from the credits of the citizens by taxation. 
When a citizen of the United States pays taxes, 
he incurs a debit for which he expects no corre- 
sponding credit. The government may obtain 4/ 



228 THE FLOW OF VALUE 

credits by taxation or by the sale of bonds. Gov- 
ernment bonds are the evidence of credit borrowed 
by the government, the interest on which it pays 
and the principal of which it pays by taxation. 
Immediate taxation, therefore, is the preemption 
of credits at the tinie in the possession of its citi- 
zens which have accrued from past production. 
For the debits to its citizens arising from their 
transfer of credits to the government in payment 
of taxes, the government renders no credits in 
return excepting the protection of their persons 
and their property. For the debits to its citizens 
arising from their transfer of credits in payment 
for bonds, the government renders such protec- 
tion in return, and also interest obtained through 
the preemption of future credits by means of taxa- 
tion. 

Loans obtained by the sale of bonds are drafts 
upon credits from the past production of its citi- 
zens in return for which it pledges credits to be 
obtained from taxes on their future production. 
If bonds are sold to part of its citizens, credits are 
obtained from the future production of all of the 
citizens in order to pay interest and principal to 
part of the citizens. If bonds are sold to all of 
its citizens, credits are obtained from the future 
production of all of the citizens to pay all of the 
citizens. 

Whether the credits secured by the government 
are obtained by taxes or by bonds, the effect is to 



THE FLOW OF DEBITS AND CREDITS 229 

withdraw from the credits of its citizens a portion 
that might otherwise be utilized by them in the 
continued production, the continued buying and 
selling, which continues the chain of credits and 
debits, and, other things equal, augments the ag- 
gregate of credits. These credits diffused by the 
government in providing equipment for its sol- 
diers and the arms and munitions of war cause 
debits to the government and credits to the manu- 
facturers. Debits accrue to the manufacturers as 
they pay wages and buy substance. So long as 
this production continues, so long will the credits 
of the government thus expended be withdrawn 
from the credits of all of its citizens. 

As war continues, a greater proportion of the 
population is placed under arms. In increasing 
degree the effort of the remaining population must 
be devoted to the support of the army, and the less 
is the proportion of its effort which can be devoted 
to meeting its own wants. More of foodstuffs and 
clothing stuffs are required for the soldiers, more 
of the ores in the production of arms and muni- 
tions. A greater proportion of the facilities for 
transportation are required for the conveyance of 
the substances to be transformed, of the coal util- 
ized in their transformation, of the utilities that 
are produced, and for the conveyance of the 
troops. Obviously, there will be a diminishing 
volume of utilities for the use and consumption of 
the population not at war. As their credits are 



^30 THE FLOW OF VALUE 

drawn by taxation, governmental borrowing, and 
subscriptions to the organizations of beneficent 
ministration to the combatants, they will have the 
less wherewith to pay for these utilities. If under 
the working of supply and demand in times of 
peace prices rise as supply diminishes, that effect 
is the more pronounced because of the extraor- 
dinary demand due to the war, and increasingly 
large numbers of the population will be obliged to 
dispense with nonessential utilities, so that the 
effort devoted to their production will diminish. 
Moreover, as rising prices mean smaller measures 
of utilities to the dollar, the dollars paid by the 
government for equipment, arms, and munitions, 
in so far as they have been derived from borrow- 
ing, will have to be repaid by taxation in the future 
derived from credits when prices may have fallen ; 
that is, when larger measures of utilit.\es may have 
to be sold for the dollar. 

When a once prosperous nation has been so re- 
duced that its efforts can produce no more than 
the essential utilities which suffice for immediate 
needs, it reverts to a lower stage of civilization. 
Works of art that were beyond price, because they 
would not be sold for any price, become without 
price, because no price can be obtained for them. 

After desolation such as may be caused by war, 
pestilence, or famine, the capacity of a people to 
resume production depends upon the mental and 
physical effort that can be put forth by those who 



THE FLOW OF DEBITS AND CREDITS 231 

are left. If sources of substance and instruments 
of production have not been radically damaged, 
and there remain many capable of putting forth 
the requisite mental and physical effort, produc- 
tion may not only be resumed but may be stimu- 
lated because of a desire to restore the ravages. 
If instruments of production have been damaged 
or even destroyed, they can be rebuilt if there is 
that frugality in individual use and consumption 
which leaves a large proportion of effort available 
for their replacement. Whether or not sources 
of substance and instruments of production have 
been damaged or destroyed, if the brain and brawn 
of the population has been exhausted, that brain 
and brawn will have to be renewed before there 
can be that resumption of production, of buying 
and selling that strengthens the chain of debits 
and credits without which there is no material 
progress. 



XVI 

VALUE 

Conspicuous among the words to which so many 
meanings have become attached that their use has 
given rise to serious confusion, is *^ value.'' In 
order that economic discussion may not be futile, 
it is imperative that in economic usage value have 
one fixed and accepted significance. It is gener- 
ally agreed among economists that it shall be used 
in economic discussion in the same sense as it is 
used in commerce; that is, in the sense of ex- 
change. An economic utility is that for which 
price can be obtained. While property is being 
retained in a utility, price is not received for it, 
but at any time the owner could receive price for it 
if he were to sell it. Thus we arrive at the distinc- 
tion between price and value. Price is that re- 
ceived for a utility at the time of sale. Value is 
that which can be obtained for a utility, that for 
which a utility can be sold. Thus every economic 
utility has value. 

That this is the true conception of value as that 
word must be used in commerce is proved by the 
inconceivability of the negative. If the owner 
of a utility will not part with it for any price that 

232 



VALUE 233 

any one else will offer, the conception of the owner 
as to the desirability of the thing for himself is 
different from the conception of any other person 
as to its desirability for himself. The conception 
of the owner is his individual estimate : it is a sub- 
jective concept only. It is obvious that, if every- 
thing in existence that is under human ownership 
were held by its owner for a price higher than any 
one would pay for it, there would be no buying and 
selling. Likewise, there could be no buying and 
selling of a thing for which no one will pay any 
price whatever ; it is without value in the economic 
sense no matter how highly its owner may es- 
teem it. 

The things and services that are held above 
price are exceptional, but a thing may be held by 
its owner for a price higher than can be obtained 
from one person in the hope that that price will 
be obtained from another ; or it may be held for a 
price higher than can be obtained at a given time 
in the hope that that price may be obtained at a 
future time. But this hoped-for price is an indi- 
vidual concept of the owner which may or may not 
coincide with that of another. 

If we were to consider the value of a thing or a 
service to be the estimate of an individual as what 
he would be willing to pay for it or that for which 
he would be willing to sell it, it might have as many 
values as there were individual estimates. In the 
absence of any other criterion no one of these esti- 



231 THE FLOW OF VALUE 

mates could have general acxjeptance. The value 
of a utility, therefore, is an estimate in which 
there is concurrence. The test of concurrence is 
what the buyer will pay and the seller will accept 
for it. That which will be received and paid for a 
utility at a given time and place may be different 
from that w'hich will be received and paid for it at 
another time and place. Therefore, the value of a 
specified utility can never definitely be fixed once 
and for all ; there can be no designation of its value 
except under limitations as to time and place. 

It is the characteristics that adapt a utility to 
meet a want that constitute it a utility, but the 
value of a utility does not depend upon the extent 
to which it meets a want nor upon the degree of 
its usefulness. Of things exactly alike, owned re- 
spectively by different persons, each may be of a 
different degree of serviceableness to its owner, 
notwithstanding that for either has been paid the 
same price as for the other, and that for either 
may be obtained the same price as for the other. 

It is what can be obtained for a utility that gives 
it value. A utility, whatever its nature, is of 
value because price can be obtained for it. With 
the price obtained, utilities can be purchased. 
Thus price is command over utilities. Therefore, 
a utility for which price can be obtained is com- 
mand over utilities, even though it may not be im- 
mediately utilizable conamand over utilities. 
Therefore, command over utilities is value, and 



VALUE 235 

value is command over utilities. Thus value is 
immediately utilizable credits, or that in which 
there is property for which immediately utiliz- 
able credits may be obtained. As price can be 
obtained for any economic utility, any utility 
gives command over other utilities. Therefore, 
apart from its nature, we may designate a util- 
ity not only as ^^of value" or *^ having value" 
but as value, because value is the attribute that 
leads to its being bought and sold. Value is fre- 
quently used in this sense in business parlance. 
The elision is justifiable especially as it serves 
convenience. Therefore, as the possession of a 
utility is the possession of command over utilities, 
the possession of a utility is the possession of 
value. 

All utilities, therefore, are value ; that is, what- 
soever in which there is property and for which a 
price may be obtained is value. Inasmuch as 
value is command over utilities, human effort put 
forth in production is value. All final utilities are 
value; lands used for residence, dwellings and 
their appurtenances are value; lands, mines, for- 
ests, and waters used as sources of substance are 
value ; instruments of production, including mills, 
factories, railroads, steamships, all machines and 
appliances, wholesale stores and retail stores, 
are value. Coin, bank notes, government notes, 
and credit entries on the books of banks are 
value. 



2S6 THE FLOW OF VALUE 

While value is a constant attribute of a utility, 
the degree of its value is variable. At the time of 
sale the degree of value is definitely determined by 
price ; at other times it is determined by the price 
that could be obtained if there were sale. While 
value is the attribute in general that causes it to 
be bought and sold, the degree of its value is its 
value. As the degree of its value changes from 
time to time, its value changes from time to time. 
As the price of a utility is determined by various 
interrelations between the supply of and the de- 
mand for utilities, so also is the value of a utility 
determined by various interrelations between the 
supply of and the demand for utilities. The price 
obtained for a utility at a forced sale often is said 
to be less than its value. This means that the sale 
has been under conditions that have caused a vari- 
ation in these interrelations that is only tempor- 
ary ; that if property in such a utility could have 
been retained until these conditions were no longer 
effective, a higher price could be obtained for it. 

Although the value of a utility is not determined 
by the degree of its usefulness, it would not be pur- 
chased unless it were useful. Utilities are bought 
and sold because they meet individual wants, or 
because they can be utilized toward the production 
of final utilities that meet individual wants. The 
value of final utilities is whatever can be obtained 
for them, and this is determined by the interrela- 
tions between the supply of and the demand for 



VALUE 237 

final utilities. The value of utilities utilized in 
the production of other utilities is whatever can 
be obtained for them, and this is determined by 
what can be obtained for the utilities produced by 
means of their utilization. A utility is purchased 
because of its usefulness in the future, perhaps at 
a time immediately subsequent to its purchase, or 
at a time more or less remote, or perhaps for util- 
ization throughout a continuing period. 

Its utilization depends upon the application of 
human effort directed by human intelligence. 
Therefore, that which underlies value is the brain 
of man. As a man puts forth effort in production, 
he emanates value ; that is, his effort in producing 
utilities brings hini command over utilities. As 
he uses and consumes food and clothing, he ab- 
sorbs value ; as he uses a dwelling and its appur- 
tenances, he absorbs value. As he acquires prop- 
erty in sources of substance or instruments of pro- 
duction, he acquires value ; and as he directs their 
utilization in the production of utilities, he pro- 
duces value. 

Therefore it is that utility and value are desig- 
nations that signify the serviceability of man unto 
man. As the first step in the production of a util- 
ity is the expenditure of human effort, the first 
sitep in the attainment of value is the expenditure 
of human effort. As the continued attainment of 
utilities is through the continued exertion of effort, 
whether in production or in buying and selling. 



238 THE FLOW OF VALUE 

the continued attainment of value is through the 
continued exertion of effort. 

As human effort is put forth in exchange for 
utilities, the possession of utilities is command 
over human effort ; thus the possession of value is 
command over human effort. The degree in 
which a man possesses value is the degree in 
which he can command human effort in produc- 
tion, or the results of human effort that have 
been produced. 

The transfer of value is the transfer of prop- 
erty in the result of human effort. In that the 
value of a utility is what can be obtained for it, its 
value is not determined by what the owner has 
paid for it, nor by what it has cost to produce it. 
Ordinarily he will not sell it for less than it has 
cost, but when he does sell it he obtains the most 
that he can. This may be more or it may be less 
than its cost. 

As the dollar is the measure of price, so also it 
is the measure of value. Or rather, as there is no 
price unless a utility is bought and sold, the dollar 
is the symbol of the value of a utility that is not in 
process of being bought and sold. On the books 
of a business organization, sources of substance 
and instruments of production may continuously 
be indicated as having the value of a certain num- 
ber of dollars. That amount is a symbol of value. 
It may be what they have cost ; it may be exactly 
what could be obtained for them if they were sold ; 



VALUE 239 

it may be greater or less than that which could be 
obtained for them. 

In the production of final utilities debits have 
been incurred as substance was purchased, wages 
paid, and other expenditures made in the proc- 
esses of their production. The total of the debits 
is the total of the cost of their production. But 
this is not the value of the utilities produced. 
Their value is what can be obtained for them. 
This may be greater or less than their cost. When 
they are sold the price obtained is their value. 

It is but seldom that a large organization, such 
as a modern corporation, is sold in its entirety. 
The capital stock certifying to ownership in it is 
divided often into hundreds and even into thou- 
sands of shares. These shares may be bought and 
sold in any number for which there may be buyers 
and sellers. In the case of many corporations, 
shares are continually being bought and sold, and 
thus the ownership of the corporations, in part, is 
continually undergoing change. Such an organi- 
zation is of no benefit to any one unless it is utilized 
in the production of utilities. If it be sold out- 
right, the purchasers may buy it for the purpose 
of selling it again, but as a rule it will pass into 
the possession of those v/ho will utilize it in pro- 
duction. The price that will be paid will be deter- 
mined nearly always not by what purchasers think 
they can obtain for such an organization in its 
entirety, but by what they think they can obtain 



240 THE FLOW OF VALUE 

by means of its utilization; that is, by the profit 
they believe they can obtain upon the investment 
by means of its utilization. Those who buy shares 
of its capital stock may do so in the intent to sell 
them at a price higher than that paid, or they may 
retain them because of the profit they believe will 
be obtained in dividends. 

When a business organization has earned divi- 
dends for a period, and gives prospect of continu- 
ing to earn them, the price that its capital shares 
will bring, and therefore their value, is determined 
in large measure by the rate of dividend. Divi- 
dends, however, depend upon net earnings, and 
these may be utilized to build up a surplus before 
dividends are paid. Therefore the lower the 
rate of net earnings, the less is the value of a 
share; the higher the rate of net earnings, the 
greater is the value of a share. Those who be- 
lieve that the prospects for a continuance of, or 
an increase in, the dividends are good will pay 
a higher price than those who do not so believe. 
The value at a given time of the shares is the 
price that may be obtained for them at that time, 
or they may be held by their owners for a higher 
price at a subsequent time. Thus while utilities 
that meet wants, or can be utilized toward meet- 
ing wants, are value, the degree of value is not 
inherent in that which is bought and sold; it is 
not a concrete characteristic of a utility. It is a 
mental concept of buyer and seller. It is deter- 



VALUE 241 

mined by belief in what can be obtained for a 
utility, or what can be obtained by means of its 
utilization. 

Utilization consists in the application of force 
under the direction of the brain to the matter- 
utilities, the so-called physical assets in which a 
business organization has property. The greater 
the volume of utilities that can be produced by the 
application of force to a given volume of matter, 
the larger, other things equal, the profit. There- 
fore, the more efficient the application of force to 
the matter-utilities constituting the physical as- 
sets of a business organization, the greater, other 
things equal, will be the resultant volume of util- 
ities and the profit derived from their sale. 
Therefore, the greatest benefit, not only to those 
who have property in the organization, but also 
to the whole people, will not be obtained by re- 
stricting the return to a certain ratio to a pre- 
determined and fixed so-called value of the ma- 
terial assets. This would offer no inducement to 
an increased efficiency in the application of force 
by means of which a greater volume of utilities 
could be produced, and a greater ratio of return 
be secured. Thus to restrict profit is to discour- 
age the application of mental effort to the greatest 
effect. 

As value designates that in which there is prop- 
erty but which is not in process of being bought 



ftn THE FLOW OF VALUE 

and sold, it follows that, when families or tribes 
lived in a state of complete self-sufficiency, there 
was no value in this sense. Although that in 
which they had property was of use to them, there 
was no transfer of property, no buying and selling 
between one family or tribe and another. It was 
likewise, when a people lived under despotism: 
the rule of the despot was, in a way, but an 
extension of the rule of the patriarch. In the 
storehouses of the Pharaohs was placed the yield 
of their subjects, and it was distributed by 
the Pharaohs among their subjects. 

There was the germ of value when the men of a 
family by hunting provided the food which the 
women prepared, for then there was the exchange 
of efforts, the exchange of the results of effort. 
The germ developed into the embryo when differ- 
ent members of a family or a tribe produced dif- 
ferent things which served the wants of members 
other than those who produced them. There 
was an advance in the embryonic development of 
value when the Pharaoh stored the grain which 
provided his subjects with food from one harvest 
to another. Their efforts were at his command 
not only for providing the utilities which minis- 
tered to existence, but also for protecting him 
against the enemy, for both aggressive and defen- 
sive warfare. In protecting him they protected 
themselves: at all times the subjects of a despot 
received a certain measure of protection because 



VALUE 243 

of the power of the despot, whether he was a 
beneficent ruler or a grinding tyrant. 

In the era of despotic rule lands were acquired 
by conquest and held by might. When the sub- 
jects of the medieval rulers progressed to the ex- 
change of things for money value in the economic 
sense emerged. When they purchased lands from 
the rulers, lands became value. To the early 
colonists on the western shores of the Atlantic, 
lands were accorded by royal charter and later by 
governmental grant. When the settlers so pro- 
gressed out of self-sufficiency that lands were 
utilized in the production of utilities for which 
price was obtained, the lands were value because 
price could be obtained for them from those who 
desired to utilize them. Or when lands, mines, 
and forests had the potentiality of utilization in 
such production, they became value. 

As, through the specialization of effort and the 
progress of invention and discovery, utilities were 
produced by decreasing portions of the popula- 
tion, there was liberated effort that was devoted 
to the provision of structures, machines, and ap- 
pliances that were utilized in continuing produc- 
tion. Thus there was the multiplication of value. 
As substance was gathered in larger quantities 
and transformed into utilities in greater volume, 
there was the multiplication of value. Value ob- 
viously multiplies as there is the accumulation of 
a surplus of utilities over those which enter into 



244 THE FLOW OF VALUE 

individual consumption. Value, therefore, multi- 
plies as accumulation exceeds consumption. 
There could not be the accumulation of value un- 
less that consumed is replaced by value in greater 
volume. The accumulation of value in the form 
of available human effort means not only increase 
in the numbers of the population, but increase in 
the effectiveness of individuals constituting the 
population. 

It is those most effective in production, in buy- 
ing and selling, who accumulate more than they 
spend, who continue to accumulate value. They 
continue to acquire that increasing command over 
human effort which, when effectively directed, 
ever tends to produce more than it consumes. 
The accumulation of value is thus not alone by 
those who spend less for individual consumption 
than they receive for putting forth individual ef- 
fort, but by those who obtain for the results of 
others more than is required to enlist those ef- 
forts. If a man engaged in production continu- 
ously obtain profit, a considerable proportion of 
which he devotes to effective production, buying 
and selling, value would tend to accumulate in 
his possession. Such sagacity and capacity have 
been exercised by many a man who, with small 
resources, has founded a business that has grown 
until its reputation is world-wide. The modern 
tendency is to the incorporation of business or- 
ganizations thus originally founded and developed 



VALUE 245 

by personal initiative. Purchasers of shares of 
stock in a corporation not only acquire participa- 
tion in the ownership of its material assets, but 
also the right to participate in the return derived 
through the application of intelligence in the util- 
ization of those assets. 

Value, other things equal, accumulates because 
of an increase in the aggregate of utilities for 
which a greater number of dollars can be obtained. 
As widening areas of land are utilized, or are of 
potential utilization in meeting a greater volume 
of human wants there is more of land for which 
price can be obtained. As the population in- 
creases, land immediately utilized in centers of 
population, and land contiguous to such centers, 
becomes of greater value because the utilization 
results in meeting a greater volume of wants. 
Land tends to vary in value in accordance with the 
volume of the wants that are met by means of its 
utilization, or the volume that its potential utiliza- 
tion is potentially efficacious in meeting. 

Substance may be of greater value as its supply 
increases, or as more dollars obtainable for a given 
supply give a greater command over utilities. A 
stock of final utilities in existence at a given time 
may be of greater value than at a preceding time 
because the volume is greater, or because for a 
volume no greater prices may be obtainable bring- 
ing a greater total of credits, giving a greater 
command over utilities. Instruments of produc- 



246 THE FLOW OF VALUE 

tion may be of a greater total of value because of 
the increase in their number and serviceability. 
The value of a given instrument may increase be- 
cause of its serviceability in producing a larger 
volume of utilities. Or it may increase because 
a rising demand for the utilities produced may 
bring higher prices resulting in credits that give 
increasing command over utilities. 

An increase in the value of a given utility means 
that a higher price can be obtained for it than 
was paid for it; that is, that it can be sold at a 
profit ; that is, that the dollars obtained will, other 
things equal, give command over utilities in 
greater measure. A final utility may thus in- 
crease in value; sources of substance, substance, 
instruments of production, shares of stocks or 
bonds of a business organization may thus in- 
crease in value. Utilities utilized in the produc- 
tion of other utilities, such as sources of sub- 
stance and instruments of production, may in- 
crease in value when the profit obtained by means 
of their utilization increases, or when it is be- 
lieved that the profit thus obtained will increase. 

Prices and profit obtainable in the future are 
uncertain, and, therefore, future value is uncer- 
tain. For example, when it is said that the value 
of a cotton crop is so many million dollars, or 
that the value of all of the crops of a given year is 
so many billion dollars, it is meant that these 



VALUE Ml 

amounts are the total of the prices received for 
them. Neither the volume of the crops nor the 
prices could have been predicted with exactitude, 
and, therefore, their value could no more than 
approximately be determined in advance of their 
sale. ' 

As the value of particular utilities may increase 
or decrease as the prices obtainable give greater 
or less command over other utilities, there is a 
relativity between the value of utilities of differ- 
ent kinds. Therefore changes in value are 
changes in the value of particular utilities. 
When we say that the value of all of the farms 
of the United States is so many billion dollars, 
it is implied that that is what could be obtained 
for them if they were sold. It is inconceivable 
that all of the property in the United States 
should be simultaneously bought and sold; that 
is, that on a given day there could be the transfer 
of property in all utilities. If such a thing could 
happen, existent utilities in certain proportions 
would be exchanged for other existent utilities in 
certain proportions. After such a conglomerate 
transaction, there would be in existence virtually 
the same utilities as before, but portions might 
have passed into the possession of those less 
capable, and other portions into the possession of 
those more capable of making efficient utilization 
of them. 



^48 THE FLOW OF VALUE 

As sources of substance yield substance, the 
value of the sources, in a measure, and the value 
of the effort applied to them, is transmuted into 
the value of the substance. When substance is 
transformed, its value — that of the effort applied, 
and, in a measure, the value of the instruments of 
production utilized in the transformation — is 
transmuted into the value of intermediate utili- 
ties, and ultimately into the value of final utilities. 
As final utilities in the form of food, clothing, 
and shelter are used and consumed, their value is 
transmuted into the value of the human effort that 
emanates from the vitality maintained. The 
value of human effort is transmuted again into the 
value of substance, of instruments of production, 
and of utilities produced. Thus value is in con- 
tinual flow and transmutation. 

When there is the direct exchange of utilities 
for utilities, as of a farm for a city residence, or 
of a mine for a mill, there is a change in the ma- 
terial assets, that is in the matter-utilities, to the 
credit of either party, but there is no conversion 
of credits into debits on the books of banks. If, 
however, for example, a man with a credit of 
twenty thousand dollars utilize it in the purchase 
of a farm, credit obtained from the sale of utili- 
ties in the past is expended for the farm. As he 
draws a check for twenty thousand dollars, an 
entry is made to his debit on the books of the 
bank, and he acquires property in the farm. As 



VALUE M9 

the former owner of the farm has sold a utility of 
the value of twenty thousand dollars, an entry in 
that amount is made to his credit when the check 
is deposited ; value represented by the utilities 
sold by the purchaser of the farm has been trans- 
muted into value represented by the farm: the 
farm is value. It has passed to the ownership 
of the purchaser who may so utilize it in further 
production that its value may increase. The 
seller of the farm may utilize his credit for twenty 
thousand dollars in the production of utilities for 
sale — in the provision of instruments of produc- 
tion, in the purchase of substance, the payment of 
wages. The value at his command will increase 
if he obtain for the utilities produced more than 
sufficient to repay the costs of production. Thus 
it is that value may accumulate in the possession 
of him who buys and of him who sells. 

So far in this discussion value has been con- 
sidered in the strict commercial significance of the 
credits obtainable for a utility which give imme- 
diate command over utilities. As, however, the 
purpose of all utilities is to minister to human 
existence, value may be accorded the broader sig- 
nificance of that which is obtained from expendi- 
ture in the furtherance of human existence, even 
though the return be not expressed by credits in 
the form of tangible utilities or on the books of 
banks. That which widens the sphere of knowl- 



250 THE FLOW OF VALUE 

edge may minister to the fullness of human exist- 
ence, even though it may not result in the attain- 
ment of credits. Likewise with that which con- 
tributes to intellectual and naoral elevation. 
When a man who has amassed great accumulations 
of credit through production, buying, and selling 
at prices determined by the interrelations between 
supply and demand, endows educational institu- 
tions, fosters research, endows drama or orchestra, 
or ministers to the fullness of the life of many 
thousands in ways which they could not provide 
for themselves, he is depriving no one. When 
such a person buys works of art which he keeps in 
a private gallery during his lifetime, he is obtain- 
ing gratification without depriving others. If he 
bequeath his collection to a public gallery, he 
passes on to the multitude the means for the grati- 
fication he has attained himself. When such per- 
sons buy and sell works of art between themselves, 
there is no deprivation to others. 

In this broader significance, value is obtained 
from expenditure that contributes to concord in 
the family, in the community, in the nation, and 
among the peoples of the nations. Under the full- 
est concord each person has the fullest opportunity 
to put forth his efforts toward the fullest achieve- 
ment of which he is capable, to obtain in the high- 
est degree that which ministers to the fullness of 
his own life in return for his contribution to the 
fullness of the life of others. And thus it may be 



VALUE 251 

that the expenditure of effort, of the results of 
effort, and of life itself entailed by a great war 
may have value if the resultant peace brings a 
fuller concord. It has been so with wars in the 
past. ''But who shall so forecast the years, and 
find in loss a gain to match, or reach a hand 
through time to catch the far-off interest of 
tears r' 



XVII 

CAPITAL 

As any person engages in the buying or selling 
of utilities of any kind, in the utilization of 
sources of substance, in the production of sub- 
stance, in the transformation of substance, in the 
production and sale of final utilities, there is con- 
tinual transmutation in the value in which he 
has property. Therefore, it is necessary for each 
person engaged in the buying and selling of utili- 
ties, in the production and sale of utilities, to keep 
record of the value in which he has property, and 
of the transmutations of value for which he is re- 
sponsible. 

When there came to be buying and selling with- 
out immediate payment, it was necessary that 
there be record of that with which the seller had 
parted but for which he had not received payment. 
The buyer might keep a separate record of that 
which had come into his possession but for which 
he had not paid, or he might rely upon the record 
of the seller. As there came to be the transfer of 
property in utilities from one seller to many buy- 
ers, and one buyer purchased from many sellers, 
it became necessary for each seller to keep an 
account with every buyer, and every buyer to 

252 



CAPITAL 253 

keep an account with each seller. Thus arose 
bookkeeping. This at first meant no more than 
the keeping of records in a book of what a man 
owed to each of various persons and of what was 
due to him from various persons, as distinguished 
from the cruder preceding methods of cutting 
notches in a stick, or making marks with chalk. 

Naturally, as a man to whom another sold util- 
ities became indebted for them he would be debited 
by the seller with their price. When he paid for 
them he would be credited. For example, when 
B sold 10 bushels of potatoes to A at 50 cents 
a bushel, he would open an account with A which 
would stand : 

A 
Dr. Cr. 

$5 

A would open an account with B which would 
stand : 

B 
Dr. Cr. 

$5 

If at a subsequent time B bought 5 sacks of flour 
from A at $1 a sack, or if A paid to him $5 dollars 
in currency, A would make entry to the debit of 
B, making the account with him stand: 

B 

Dr. Cr. 

$5 $5 



^54 THE FLOW OF VALUE 

and B would make entry to the credit of A making 
his account with him stand: 

A 
Dr. Cr. 

$5 $5 

Thus the account of A with B and the account of 
B with A would be balanced. Under the supposi- 
tion that there then were a bank, and A gave B 
his check for $5, there would be entry on the 
records of the bank to the debit of A and to the 
credit of B in the amount of $5. 

As a producer came to have a stock of utilities 
from which he made sale from time to time, he 
would want to know what it cost to produce these 
utilities, and whether this were greater or less 
than the amount he received for them. For ex- 
ample, B might want to know what he had ex- 
pended to obtain a given yield of potatoes, and 
to contrast this with what he had received for 
them. He would open an account with ** Pota- 
toes.'' If he paid $50 for feed, fertilizer, wages, 
and other utilities utilized in the production, he 
would debit Potatoes in that amount, making the 
account stand: 

Potatoes 
Dr. Cr. 

$50 

As he sold 10 bushels of potatoes to A, at 50 cents 
a bushel, he would not only debit A but he would 
credit Potatoes, making the account stand: 



CAPITAL 255 

Potatoes 
Dr. Cr. 

$50 $5 

A 
Dr. Cr. 

$5 

When A paid him a check for $5 and he deposited 
that check in a bank, he would credit A and debit 
the bank, making these accounts stand: 





A 




Dr. 




Cr. 


$5 


Bank 


$5 


Dr. 




Cr. 


$5 







He would then have placed into Potatoes $45 more 
than he had received. He would be entitled to 
draw against the credit to his account on the rec- 
ord of the bank in payment for utilities to the 
amount of $5. 

As he sold potatoes to various purchasers, B 
would make entry on his books to the credit of 
Potatoes and to the debit of the purchasers. As 
the purchasers made payments, he would make en- 
try to their credit. As he deposited the payments 
in the bank, B would make entry on his books 
to the debit of the bank, and the bank would make 
entry on its books to the credit of B. If, for ex- 
ample, his yield were 150 bushels of potatoes which 
he sold at 50 cents a bushel, entries to the credit 



256 THE FLOW OF VALUE 

of Potatoes would amount to $75. This would 
mean that for the potatoes it had cost $50 to pro- 
duce he had received $75. This would be double- 
entry-bookkeeping. Every transaction would give 
rise to an entry to debit and an entry to credit. 
Thus would be kept record of the transmutations 
of value as debits were incurred in raising pota- 
toes, as credits were received for them, as these 
credits were deposited in the bank, and as debits 
were incurred as indicated by the checks drawn 
against them. When a series of transactions re- 
sulted in an accumulation of credits in excess of 
debits, the surplus would be profit; if the debits 
exceeded the credits, the debit balance would be 
loss. 

When B specialized in the raising of potatoes 
for sale, he would be obliged to obtain from each 
yield sufficient to enable him to pay the cost of 
production of the subsequent yield. If he had ex- 
pended $100 all told in producing a given yield, 
he would be obliged in order to make the same 
expenditure toward producing a future yield to 
obtain at least $100 from its sale. One hundred 
dollars would constitute his capital, or rather his 
business capital. This he would desire in any 
event to retain unimpaired, and he would en- 
deavor to increase it. If from a given yield he 
received profit of $50, he could expend it for vari- 
ous final utilities for the use and consumption of 
himself and those dependent upon him, or he 



CAPITAL 257 

could add it to his business capital. A man ac- 
cumulates business capital by not expending all 
that he receives for personal comfort and gratifi- 
cation, but by utilizing a portion of his credits in 
future production. As a man accumulates value 
which he utilizes as business capital, he is obliged 
to keep record of it, and thus to have an account 
with * ^ Capital. ' ' If, for example, when he had ac- 
cumulated $100 and placed his credit of that 
amount in the way of utilization in production, 
that amount would stand to the debit of capital. 
As he made various purchases, the amounts would 
be credited to capital. At the end of a specified 
period profit received would be debited to cap- 
ital, or loss incurred would be credited to capital. 
Thus capital would be replenished and increased 
or impaired from time to time, as the owner was 
successful or unsuccessful in obtaining return that 
exceeded his expenditure. 

Business capital acquires an added significance 
when there is investment in instruments of pro- 
duction that are utilized in continued production. 
In that medieval period when the craftsman went 
from house to house, transforming into utilities 
the substance supplied by his customers, there 
was little of business capital. The customer kept 
little or no record of the substance he supplied 
the craftsman, and the craftsman had no instru- 
ments of production other than the tools he car- 
ried with him. But as there evolved the crafts- 



258 THE FLOW OF VALUE 

man transforming in his own shop with his own 
tools the substance which he purchased, there 
evolved business capital. He had been obliged to 
provide stock and tools and to purchase substance. 
This meant a certain accumulation of value. If 
he had always lived from hand to mouth, he never 
would have effected this saving for utilization as 
business capital. Moreover, as he came to employ 
wage-earners, he would be obliged to have cap- 
ital wherefrom to pay wages. Thus there would 
arise the distinction between fixed capital — that 
invested in instruments of production continu- 
ously utilized, and working capital — that invested 
in substance, wages, in all designated as running 
expenses. From the sale of utilities produced 
must be derived credits sufficient not only imme- 
diately to replenish working capital, but to pro- 
vide from time to time for an accumulation of 
credit that will suffice for the repair, renewal, and 
replacement of instruments of production. 

When an accumulation of value was invested 
in shop and tools, the account with Capital, in 
order to exhibit the transmutations of value, 
would have to show the amount of the investment 
and that in which it was invested. The entry, for 
example, might be as follows : 

Capital 
Dr. Cr. 

Capital investment. . .$600 Shop $500 

Tools 100 



CAPITAL 259 

If he had in addition $200, wherewith to buy sub- 
stance and pay wages, the account would stand : 

Capital 

Dr. Cr. 

Capital investment. . .$600 Shop $500 

Cash 200 Tools 100 

Business capital of record on the books of a 
business organization consists of the physical as- 
sets composed in the main of matter-utilities, and 
of the total of credit constituting its working cap- 
ital. There need be no change in the debit to fixed 
capital, that is to physical assets, so long as prop- 
erty in them is retained, and so long as they can 
be sold for credit equivalent to the debit. Work- 
ing capital, however, is transmuted into the value 
of substance and into the value of force applied 
to that substance as running expenses are in- 
curred, and it is replenished as the value of utili- 
ties produced is transmuted into credits in favor 
of the business organization. That obtained by 
buying and selling which accrues to profit is cred- 
ited to its *^ Profit and Loss'' account. If the re- 
sults of buying and selling are to its loss, the 
amount is debited to this account. As the expend- 
itures exceed the receipts, its capital will diminish. 
As the receipts exceed the expenditures, its cap- 
ital may increase. If profit be not added to the 
capital of the organization but paid to the pro- 
prietors, it is the return to them as individuals 



260 THE FLOW OF VALUE 

upon the contribution they have respectively made 
to its capitaL 

Capital is recorded in terms of dollars. For the 
physical assets entering into the capital of a busi- 
ness organization at a given time and for which 
a given number of dollars have been paid, a 
greater or less number of dollars may be obtain- 
able at another time. If its capital is to remain 
unimpaired in the event that these matter-utilities 
fall in relation to the dollar, it must be augmented 
by profit or by additional investment. If its cap- 
ital is irretrievably impaired, the amount of the 
investment must be ^* written down^' on the books. 

Before the use of steam as power, the tools used 
in agriculture and in the crafts were few and sim- 
ple. Lands, buildings, and the domestic animals 
of use were value in the possession of their own- 
ers, but did not constitute business capital in the 
full modern sense of that term. It was likewise 
with the horses, wagons, and stage coaches, sheds 
and stables, owned by the carriers by land. There 
was then but little practice of bookkeeping of any 
kind. The use of steam brought the mill, the fac- 
tory, and the railroad, each employing managers, 
superintendents, foremen, and a long list of em- 
ployees. To the inauguration of such an organ- 
ization was requisite the investment of capital in 
large amount. That is, credits accumulated from 
past production and sale were used for the pur- 
chase of land, in paying for the effort by means 



CAPITAL S61 

of which were constructed buildings, machines, 
and appliances, in providing the working capital 
with which substance was purchased and wages 
were paid. Then the practice of double-entry 
bookkeeping extended. The increase in the vol- 
ume of utilities bought and sold led to the develop- 
ment of the modern bank. The evolution of 
double-entry bookkeeping has virtually been coin- 
cident with the evolution of the adjustment of 
transactions by nieans of checks and entries on 
the books of banks. 

A large busines-s organization, such, for exam- 
ple, as a corporation engaged in the manufacture 
of steel, may have property in sources of sub- 
stance, such as lands and beds of ore; in instru- 
ments of production, such as mines and mills, 
steamboats and railroads with their equipment 
of machines and appliances; may purchase sub- 
stances of various kinds in large quantities, trans- 
form them into utilities vast in volume, pay wages 
to many thousands of men from its executive ojQfi- 
cers to those who dig in the mines and sweep the 
floors of the mills. It may have capital stock cov- 
ering proprietary investments of millions of dol- 
lars and bonds pledging millions of dollars. It 
may utilize sources of substance and instruments 
of production not only under ownership but un- 
der lease, stipulating the payment of rental. It, 
therefore, will have accounts with capital and with 
various utilities and aggregates of utilities that 



262 THE FLOW OF VALUE 

enter into its capital — ^with substances of various 
kinds, with wages, with utilities produced and 
sold. These accounts may be divided and subdi- 
vided to exhibit the debits and credits due to any 
part of its physical assets or to any phase of its 
operation. 

Every entry to debit indicates the transmuta- 
tion of value in the form of credit derived from 
the sale of utilities in the past into value in the 
form that will be utilized in the production of 
utilities for sale in the future. Every entry to 
credit indicates the transmutation of value in the 
form of utilities that have been sold into value 
which may be utilized in the purchase of further 
utilities. The surplus of credits over debits, or 
of debits over credits, accruing from the operation 
of any portion of its assets, or any phase of its 
functions with which an account is kept, is fo- 
cused in the profit and loss account which exhibits 
the total of profit secured or of loss sustained dur- 
ing a given period. In but small proportion are 
the products of a steel corporation final utilities 
that immediately meet the wants of individuals. 
In overwhelmingly large proportion they are util- 
ities which are utilized by their purchasers in the 
production of other utilities. Beams and other 
structural forms are wrought into instruments of 
production, structures, machines, and appliances; 
rails into the tracks of railroads ; sheets and other 
forms into the manufacture of cars and locomo- 



CAPITAL 263 

tives and of vessels large and small. Bars are 
wrought into tools, utensils, and various forms 
of hardware. Thus a steel corporation employs 
the efforts of thousands of men in the application 
of the force resulting in the production of utili- 
ties which are utilized in the production that re- 
sults ultimately in the final utilities which meet the 
immediate wants of the individual. 

Although a utility passes from the hands of one 
to the hands of others at every stage of transfor- 
mation, its ownership does not necessarily change 
at every stage. Its ownership may, however, 
change at any stage. At every transfer of owner- 
ship, there is the exchange of the results of all the 
ramifications of force that have focused in the 
production of the respective utilities that are ex- 
changed. At whatever stage there is the change 
of ownership, there is the balancing of credits re- 
ceived against debits incurred. When there are 
various changes of ownership at various stages of 
production, profit is made or loss sustained at 
each stage. When there is continual ownership 
from the first to the last stage, there may be the 
balancing of debits incurred against credits re- 
ceived at the last stage only. 

The last stage of the production of final utili- 
ties, that which results in their assembly at the 
place where and the time when they are desired 
by the final purchaser, is exemplified by the func- 
tions of a great department store. It purchases 



264 THE FLOW OF VALUE 

final utilities in great variety from many manu- 
facturers and sells them to a multitude of pur- 
chasers. The efforts of hundreds of thousands of 
men are exerted directly and in the application 
of force through countless machines in the divi- 
sion and the subdivision of substances which are 
combined and recombined in the course of their 
transformation into the final utilities that are sold 
in the department stores and other retail estab- 
lishments throughout the country. 

The annual report of a steel corporation or of 
a department store is an exhibit of that in which 
it has property constituting its fixed capital, of 
all that is embraced in working capital, and of the 
transmutations of value for which it has been 
responsible throughout the year. But production 
and sale do not begin with the first day of the 
year nor cease with the last day of the year. The 
utilization of sources of substance and instruments 
of production continues ; substance is ever in proc- 
ess of transformation and stocks of final utilities 
are ever awaiting sale. The balance sheet, the 
income account, all of the statements that are 
embodied in the annual report of a business organ- 
ization, are an exhibit for a period that seldom 
synchronizes with any clearly marked period of 
operation. 

An entry to its debit in the record of accounts 
on the books of a business organization means 
that value has passed from others to it. An entry 



CAPITAL 265 

to its credit means that value has passed from it 
to others. If every business organization and 
every individual or every family kept such ac- 
counts, there would be a complete record of all of 
value throughout all of its transmutations. 



XVIII 

THE ULTIMATE UNITS OF PEODUCTION AND 
CONSUMPTION 

As business organizations increase in magni- 
tude, their purchases and their sales increase. 
Credits flow to them in great totals as they pro- 
duce and sell utilities in vast volumes. Debits 
are incurred in great totals as they pay wages in 
the large amounts composed of the smaller 
amounts paid to each wage-earner. Debits are in- 
curred in great totals as they pay for substance 
in the quantities composed of the smaller meas- 
ures in which it is taken from its sources. Mer- 
chants incur debits in large totals and receive 
credits in large totals as they buy and sell vast 
volumes of final utilities. No matter how large 
the transactions, they arise from the activity of 
human beings in meeting the wants of human be- 
ings. But because of the interweaving of human 
effort and cosmic force, it becomes ever more diffi- 
cult to trace the effect of the effort of any given 
person in the production of any given utility. 
Often portions of the efforts of a number of per- 
sons, sometimes of hundreds or of thousands, are 
coordinated in the apijlication of cosmic force in 

266 



THE ULTIMATE UNITS 26T 

the production of even the smallest measure of a 
utility of general use. 

The dollar continues to be the expression of 
the relation betv/een effort put forth and wants 
met. Or rather, as human effort more and more 
becomes merged with all of the productive forces 
of which it avails and which it directs, the dollar 
comes to be the expression of the relation be- 
tween a measure of force applied and a measure 
of the wants met by the results of its application. 
It is no longer the aggregate alone of human effort 
put forth, and the aggregate of wants met. It 
now becomes an aggregate of force applied, and 
an aggregate of wants met. The aggregate of 
force is composed of human effort emanating from 
the body and the brain, and of the cosmic force 
applied by means of human effort. 

As any aggregate is divisible into its parts, the 
aggregate of force applied in production must be 
so divisible. Let us designate a unit of force so 
applied as a force-utility-unit. The aggregate of 
wants that are met must also be divisible. Let us 
designate a unit of wants met as a want-utility- 
unit. 

When we have arrived at the conception of a 
unit by which to measure force applied in meet- 
ing wants, and of a unit by which to measure 
wants met, it follows that these units may be ap- 
plied to any measure of force or to any measure 
of wants. That is, as all matter having linear 



^68 THE FLOW OF VALUE 

relation to space is divisible into yards, the yard 
may be applied to the measurement of any form 
of matter having that relation ; and as all matter 
having relation to the force of gravity is divisible 
into pounds, the pound may be applied to measure 
any form of matter having relation to the force 
of gravity. So also may the force-utility-unit be 
applied to any measure of force applied in the 
production of utilities, and the want-utility-unit 
may be applied to any measure of wants that are 
met. 

If it be objected that such units as these are 
without practical significance, there is the reply 
that units of density, of specific gravity, and other 
units that once were beyond conception have been 
determined in various fields of science, and are 
now indispensable, although they are little used in 
the routine of daily life. The electron, the atom, 
and the molecule are unknown to the transactions 
of industry and commerce, although things meas- 
ured by such commercial units as pounds, bushels, 
and yards are built up of electrons, atoms, and 
molecules; and therefore they are the ultimate 
constituents of every material thing that enters 
into industry and commerce. So also is the force 
applied in the production of utilities, and the 
wants that are met by the utilities produced, built 
up of ultimate units. As electrons, atoms, and 
molecules are combined and recombined into forms 
of matter of endless variety, so also are force- 



THE ULTIMATE UNITS 269 

utility-units combined and recombined in their ap- 
plication. 

The very fact that the dollar is applied to that 
which produces and to that which is produced, 
demonstrates that that which produces is divisible 
into the measures to which the dollar is applied, 
and that which is produced is divisible into the 
measures to which the dollar is applied. That 
which produces is force. Applied to the sources 
of substance, force produces utilities in the form 
of substance; applied to substance, force trans- 
forms it into intermediate utilities ; applied to in- 
termediate utilities, force transforms them into 
final utilities. By means of final utilities, human 
wants are met. Therefore, in the ultimate anal- 
ysis it is force-utility-units and want-utility-units 
that are measured by dollars. 

When a producer buys utilities in the form of 
substance, or intermediate utilities into which sub- 
stance has been transformed, he buys the results 
of that application of force for which wages have 
been paid to human beings who have been instru- 
mental in its application. His payment for instru- 
ments of production and all requisite to their 
operation is likewise payment for the results of 
the application of force for which wages have been 
paid to the human beings who have been instru- 
mental in its application. The direct payment of 
wages is for human effort enlisted in that appli- 
cation of force for which the producer is respon- 



a70 THE FLOW OF VALUE 

sible. The primary function of production, there- 
fore, is the application of force, of force-utility- 
units, whether of human effort or of cosmic force. 
The measurement of force by the degree of in- 
tensity applied during a given time as, for ex- 
ample, the kilowat-hour, suggests the unit by 
which effort put forth by a human being may be 
measured in its relation to that human being. The 
instrument that puts forth human effort is the 
man : the smallest integral unit of the period dur- 
ing which he exerts effort is the hour. Therefore, 
analogy leads to the man-hour as the designation 
of such a unit. That kind of mental effort which 
conceives, designs, and directs can not be meas- 
ured by hours of definite application, because it 
is often the result of conscious thought that ab- 
sorbs nearly all of the waking hours, and may be 
of subconscious cerebration that proceeds even 
during sleep. But that kind of human effort 
which is similar to mechanical force in that it is 
of physical effect is definitely put forth during 
working hours. Thus perhaps it fairly can be 
measured by man-hours, even though the man- 
hours of men of different races, and of men of the 
same race, are of different quality and effect. The 
tendency toward the payment of the same wage 
to men of an equal degree of efficiency obviously 
is a tendency toward the payment of the same 
wage for man-hours of an equal degree of effi- 
ciency. 



THE ULTIMATE UNITS 271 

The hour can not fairly be taken as the unit 
of the time during which human existence is main- 
tained. The round of nutrition, work, recreation, 
sleep, corresponds to the day of twenty-four 
hours. During that period vitality reaches its 
highest tension, and ebbs to its feeblest pulsation. 
Therefore, the smallest unit by which human exist- 
ence adequately can be measured is the man-day. 
Thus effort put forth during man-hours supports 
existence during man-days. 

The difficulty of arriving at exact definition be- 
sets measurement by all kinds of units whether 
of area, length, weight, volume, or number. An 
acre of land of one kind may be vastly different 
in its characteristics from an acre of land of an- 
other kind; wheat is measured by bushels, but 
there also has to be indication of the grade. So 
also with cotton, potatoes, lumber, utilities of any 
kind. In addition to the units by which they are 
measured as forms of matter, there must be indi- 
cation of the kind and quality. Variance in that 
which is measured by a common unit finds illustra- 
tion in the fact that matter of the same chemical 
constituents in the same proportions may exist 
in solid, liquid, or gaseous form. Although un- 
changed in its essence, its measurement by weight 
would vary in relation to measurement by volume 
as it was in one form or another. The grouping 
of things of specific designation into general 
classes, and the reduction of the general classes 



%n% THE FLOW OF VALUE 

to measurement by a common unit, is exemplified 
by the jest of the man in a restaurant who said 
to a waiter, ** Bring me an assortment of proteins, 
fats, and carbohydrates ; about eight hundred cal- 
ories. I leave it to you/* It is not at all incon- 
ceivable that the time may come when a trained 
waiter will accept and comply with such a request, 
just as he now fills an order for steak, potatoes, 
and salad. 

Whatsoever has that relation to time or space 
or force which makes it susceptible of definite 
designation is, at least in the abstract, susceptible 
of measurement by a unit which indicates the de- 
gree of that relation. Therefore, the force-utility- 
unit and the want-utility-unit, the man-hour and 
the man-day are not without a logical basis. 

If the aggregate of force applied always re- 
sulted in the production of utilities that met the 
aggregate of wants, there would be exact corre- 
spondence between the aggregate of force-utility- 
units and the aggregate of want-utility-units. 
Therefore, the force-utility-unit and the want- 
utility-unit might exactly correspond. As, how- 
ever, only a portion of the force-utility-units are 
of human effort, the aggregate of the force-utility- 
units of the man-hours applied in production 
would not correspond to the aggregate of the 
force-utility-units applied in production. As the 
effort of different men is of different effect, a 
man-hour would not coincide with a definite num- 



THE ULTIMATE UNITS' 273 

ber of force-utility-units; that is, the different 
man-hours of different men would represent differ- 
ent totals of force-utility-units. And as there is 
a difference in thei wants of different persons, the 
man-day of one would represent a number of 
want-utility-units different from that of another. 
Therefore, different measures of want-utility- 
units would be required for the man-days of differ- 
ent men, and different measures of force-utility- 
units would be applied by the man-hours of differ- 
ent men. Therefore, human effort could not be 
measured exactly by man-hours, but by force- 
utility-units ; human wants could not be measured 
exactly by man-days, but by want-utility-units. 
That is, want-utility-units would be received by 
different men in different measures, and force- 
utility-units would emanate from different men 
in different measures. That is, the force-utility- 
units of the man-hour of one man would buy want- 
utility-units in different measures from the force- 
utility-units that the man-hour of another man 
would buy. 

Therefore, it would be a certain number of force- 
utility-units that would buy a certain number of 
want-utility-units, and a certain number of want- 
utility-units that would buy a certain number of 
force-utility-units. Thus there would have to be 
a unit for the designation of the number of want- 
utility-units that a given number of force-utility- 
units would buy; and, conversely, of the number,. 



274 THE FLOW OF VALUE 

of f orce-utility-units that a given number of want- 
utility-units would buy. The dollar practically is 
such a unit. The dollar pays for a certain num- 
ber of force-utility-units, and it pays for a certain 
number of want-utility-units. 

If the aggregate of force applied always re- 
sulted in the production of utilities that met the 
aggregate of wants, the result of one force-utility- 
unit might be one want-utility-unit. Thus, as one 
force-utility-unit would exactly correspond with 
one want-utility-unit, *^utility-unif might serve 
as a common designation of a unit of force applied 
and a unit of want met. As it is, however, greater 
or less measures of force are applied in the pro- 
duction of the measure of utilities of one kind 
which have the ratio of the dollar, than are ap- 
plied in the production of the respective measures 
of utilities of other kinds that have the ratio of 
the dollar. That is, the same number of dollars 
are paid for different measures of force-utility- 
units and of want-utility-units. Therefore, the 
relation between the force-utility-unit and the 
want-utility-unit varies from the standpoint of 
buying and selling. 

Nevertheless, it may not be impossible to con- 
ceive of a utility-unit. If there could be deter- 
mined the essential utilities in their simplest 
forms and in their respective proportions required 
for the support of the simplest man-day, such as 
the number of calories required for food, the num- 



THE ULTIMATE UNITS 275 

ber of thermal units required for clothing and for 
shelter, the number of cubic feet of air required 
for respiration, and we could arrive at the force- 
utility-units required in their production, we 
should have a primary and fundamental unit for 
the expression of force-utility-units in terms of 
want-utility-units, and for the expression of want- 
utility-units in terms of force-utility-units. This 
unit could be termed the utility-unit. Then the 
number of force-utility-units required to produce 
the utilities necessary to support the least effec- 
tive man-day could be designated the utility-unit. 
Conversely, to maintain support for one day a 
man would have to pay one utility-unit. Man- 
hours of different kinds, qualities, and effects 
could be measured by the utility-unit, by multi- 
ples or fractions thereof. Utilities of different 
kinds could be bought and sold in terms of the 
utility-unit, in multiples or fractions thereof. 

Far fetched as this suggestion may seem, it is 
indisputable that as human effort is primarily put 
forth to maintain human existence, the unit of ex- 
change, by whatever term it be designated, must 
have a relation to the man-hours required for the 
support of man-days. This is the basis of the 
relation between effort applied and wants met 
that finds expression in the dollar. Dollars are 
paid to men for effort put forth, or for the re- 
sults of effort put forth; they are primarily paid 
by men for that which maintains their existence. 



276 THE FLOW OF VALUE 

If force-utility-nnits and want-utility-units could 
be determined, these units would have a relation 
to the man-hour and the man-day. They would 
be the units into which the man-hour and the man- 
day were ultimately resolved. 

This follows from the fact that the lowest wage 
which continuously can be paid to any person en- 
gaged in production is that which will enable him 
to buy the underlying utilities essential to his ex- 
istence. This is true, even though in the produc- 
tion of utilities of every kind are enlisted various 
men of varying capacity in the exertion of efforts 
that differ in kind, quality, and effect. If an em- 
ployer needs crude and simple physical effort 
only temporarily or sporadically, as in shoveling 
snow from his sidewalk or carrying a load of coal 
into his cellar, he may, if there be a man willing 
to accept it, pay for the job no more than enough 
to enable him to buy food that will maintain his 
vitality for only a limited period. If the employer 
needs such crude physical effort continuously, on 
a farm, in a mine, mill or factory, office or store, 
he possibly may be able to obtain it by paying 
such wages from day to day, if there are those 
who are obliged to work for such wages. But 
such men will be of low physical strength. From 
lack of capacity or lack of inclination they will 
not be able to do even crude work with any degree 
of steadiness. The employer must pay wages that 
enable employees of even the lowest grade to 



THE ULTIMATE UNITS 277 

obtain the food, clothing, and shelter necessary 
to maintain their vitality at least as long as their 
employment continues. So also with every man 
who puts forth effort, whether at the behest of 
an employer or whether by what is called *^ work- 
ing for himself,'' which is no more than working 
for his customers — a number of employers instead 
of one. He can not continue to put forth his 
efforts unless he receives the essential utilities in 
the proportions required to maintain his existence. 
Thus, if the man-day be taken as the unit of man 's 
existence, he must be supplied with the essential 
utilities in the proportions required to maintain 
his existence for a man-day. 

Inasmuch as through the specialization of ef- 
fort, the coordination of effort, the specialized co- 
ordination of human effort and cosmic force, which 
has been facilitated by discovery and invention, 
the number of man-hours required for the sup- 
port of the man-day tends to decrease, or, what 
amounts to the same thing, a greater number of 
man-days can be supported with a given number 
of man-hours, the man-hours applied at a previ- 
ous time have tended to result in the provision of 
a greater volume of want-utility-units at a suc- 
ceeding time. The greater the proportion in 
which force-utility-units are constituted of cosmic 
force, the greater will be the volume of want- 
utility-units produced in relation to a given num- 
ber of man-hours, and, therefore, other things 



278 THE FLOW OF VALUE 

equal, the greater the number of man-days they 
will support. As there has been the multiplica- 
tion of want-utility-units in volume beyond that 
needed for the support of the population that ex- 
erts demand, there has been an increase in the 
variety of utilities produced by the application 
of the man-hours of those engaged in produc- 
tion. 

As man-hours are devoted to the production of 
other than the essential utilities, the relation of 
man-hours to the utility-unit varies, the relation 
of utilities to the man-day varies. Those whose 
man-hours bring only the utilities requisite for 
the support of the man-day continue to obtain 
the utility-unit. Those whose man-hours bring 
greater credits receive more than the utility-unit. 
The relation of utility-units to their respective 
man-days is different. 

But, inasmuch as the utility-unit expresses the 
simplest relation of supply and demand, it fol- 
lows that other utilities of whatever kind must 
bear a certain relation to the utility-unit. As the 
man-hours of one man are more effective than 
those of another, the utilities he receives are mul- 
tiples of the utility-unit. As utilities are more 
than sufficient for the maintenance of the man-day, 
they are multiples of the utility-unit. Inasmuch 
as the utility-unit is an expression of the relation 
of the essential utilities in relation to man-hours, 
of supply to the man-day, it follows that the util- 



THE ULTIMATE UNITS 279 

ity-unit is the fundamental unit of supply and 
demand. 

This discussion of force-utility-units, want-util- 
ity-units, and the utility-unit, of man-hours and 
man-daj^s is necessarily hypothetical. Even 
though these hjrpothetical units can not, at least 
in the light of our present knowledge, be deter- 
mined with even an approach to exactitude, they 
will serve a useful purpose in what here can not 
be more than a supposititious application. 

Let us, for example, make such an application in 
a review of a phase of commercial and industrial 
activity. On the farm there is the plowing of 
the soil, the sowing of the seed, the reaping of 
the stalks, the threshing of the grain, its trans- 
portation to the country elevator. Thence the 
grain passes to the mill, perhaps in a remote city, 
where it is converted into Hour. The flour passes 
to the wholesale dealer, who sells it to the bak- 
ing company, which converts it into the bread 
that passes to the consumer. This course from 
the production of the substance to the production 
of the final utilities is marked by four transfers of 
ownership ; first, of the grain when it passed from 
the farmer to the milling company at the country 
elevator ; second, of the flour when it passed from 
the milling company to the wholesale dealer ; third, 
when it passed from the wholesale dealer to the 
baker; fourth, when the bread passed from the 
baker to the consumer. 



280 THE FLOW OF VALUE 

Now let us suppose that to the production of 
a given quantity of bread there were applied on 
the fami 10,000 force -utility-units of which 4000 
were the result of ten men working twenty hours 
each, or of 200 man-hours; that on the railroads 
from the elevator to the mill were applied 10,000 
force-utility-units of which 2000 were represented 
by 100 man-hours; that at the mill were applied 
10,000 force-utility-units, of which 1000 were rep- 
resented by 50 man-hours ; that in transportation 
to the wholesale dealer were applied 12,000 force- 
utility-units, of which 2000 were represented by 
100 man-hours; that at the wholesale warehouse 
were applied 2000 force-utility-units, of which 800 
were represented by 40 man-hours ; that in trans- 
portation to the bakery were applied 2000 force- 
utility-units, of which 200 were represented by 10 
man-hours ; that at the bakery were applied 10,000 
force-utility-units, of which 2000 were represented 
by 100 man-hours ; that in conveyance to consum- 
ers were applied 10,000 force-utility-units, of 
which 200 were represented by 100 man-hours. 
On the supposition that the bread into which the 
grain finally was converted was sufficient, perhaps, 
for the three meals of 10,000 persons for one day, 
and that of these 10,000 persons 2000 put forth 
effort of eight hours a day, the 700 man-hours 
represented all of human effort immediately ap- 
plied in supplying the bread for 10,000 man-days 
frona which emanated 16,000 man-hours applied 



THE ULTIMATE UNITS ^81 

in production. To be sure, other kinds of food 
than bread entered into the consumption. Let it 
be supposed that into the supply of all of the 
food entered 5000 man-hours; of all of the cloth- 
ing, 2000 man-hours ; of all of the shelter, and its 
appurtenances, 1000 man-hours; and of all other 
final utilities, 500 man-hours. Thus the force of 
8500 man-hours was all of the human effort imme- 
diately exerted in supplying the final utilities for 
10,000 man-days from which emanated 16,000 man- 
hours immediately applied in the transformation 
of substance into final utilities. There remain 
7500 man-hours applicable to the transformation 
of substance into instruments of production and 
into various other utilities. 

In an attempt briefly to give some indication of 
the ramifying transfers of debits and credits that 
are correlative with production, buying, and sell- 
ing, and that depend ultimately upon the relation 
of man-hours to man-days, let us premise that at 
a given time, as the result of transactions in the 
past, all responsible for production have dollars 
to their credit on the books of banks sufficient to 
pay for substance, and to pay wages requisite to 
further production; that all merchants, whether 
wholesale or retail, have dollars to their credit 
sufficient to pay for incoming stock and to pay 
wages; that all purchasers of final utilities have 
sufficient dollars to their credit to enable them to 



^82 THE FLOW OF VALUE 

pay for them; and that all payments are made by 
checks on banks. 

Let us suppose that for each of the 20,000,000 
families in the United States there is one person 
actively engaged in the processes of industry and 
commerce ; that is, that 20,000,000 are so engaged. 
Let us suppose that 3,000,000 are engaged in farm- 
ing, that is in raising substance for food and sub- 
stance for clothing; that 1,000,000 are engaged in 
lumbering ; 1,000,000 in raining ; 2,000,000 in trans- 
portation; 3,000,000 in manufacturing, that is in 
the operation of mills and factories; 1,000,000 in 
wholesale dealing; 2,000,000 'in retail dealing; 
1,000,000 in the provision of instruments of pro- 
duction ; the remaining 6,000,000 in all other occu- 
pations, including domestic service and the prac- 
tice of the professions and the arts. 

It is those responsible for production and ex- 
change who receive credits for the utilities sold, 
and incur debits to those who have contributed to 
the production. Therefore, it is necessary to sub- 
divide the foregoing groups into groups of em- 
ployers and employees. Let us suppose that this 
subdivision is as follows : 

Engaged in Employers Employees Total 

Farming 500,000 2,500,000 3,000,000 

Lumbering 100,000 900,000 1,000,000 

Mining 100,000 900,000 1,000,000 

Transportation 100,000 1,900,000 2,000,000 

Manufacturing 500,000 2,500,000 3,000,000 

Wholesale dealing 100,000 900,000 1,000,000 

Retail dealing 500,000 1,500,000 2,000,000 



THE ULTIMATE UNITS 283 

Providing instruments of 

production 100,000 900,000 1,000,000 

2,000,000 12,000,000 14,000,000 

All other occupations 6,000,000 

20,000,000 



The shoppers for the 20,000,000 families pur- 
chase from the 500,000 retail dealers food and 
clothing and the divers things of household need. 
For these utilities they pay checks to the retail 
dealers, who deposit them in their banks. The 
retail dealers receive from the wholesale dealers, 
through the agencies of transportation, utilities to 
replace those sold. They pay checks to the 
agencies for transportation, and to the wholesale 
dealers. They must pay wages to their million 
and a half employees, for all that is required in the 
conduct of their business, and must purchase final 
utilities for themselves and their families. All of 
those engaged in retail dealing are themselves 
customers of retail dealers. From the retail 
shops final utilities pass for the use and consump- 
tion of 20,000,000 families. That is, the 2,000,000 
persons engaged in retail dealing assemble for 
20,000,000 families the utilities they want at the 
place where and the time when they want them. 

The checks received by the 100,000 wholesale 
dealers give rise to entries to their credit on the 
books of banks. They obtain from manufactur- 
ers, by means of transportation, utilities to re- 



284i THE FLOW OF VALUE 

place those consigned to the retail dealers. They 
pay checks to the manufacturers, and to the trans- 
porters, for wages to their employees, for all that 
is required in the conduct of their business, and 
for the final utilities for themselves and their fam- 
ilies. From those engaged in farming, lumbering, 
and mining the manufacturers obtain substance, 
which they transform into utilities to replace those 
consigned to the wholesale dealer. To replace the 
substance consigned to manufacturers, the 700,000 
employers in farming, lumbering, and mining pro- 
duce foodstuffs, clothing stuffs, logs, and min- 
erals. The checks received from the manufactur- 
ers enable them to pay wages and to purchase the 
things they need. 

Thus we perceive that under our supposititious 
grouping 5,000,000 persons engaged in farming, 
lumbering, and mining supply foodstuffs, clothing 
stuffs, and minerals; 2,000,000 persons provide 
transportation; 3,000,000 transform substance 
into further utilities; 1,000,000 supply wholesale 
service; and 2,000,000 retail service. The em- 
ployers in each occupation need structures, ma- 
chines, and appliances. Portions of the credits 
received by them must be paid to the 100,000 em- 
ployers engaged in this provision, who pay wages 
and for the other utilities they need. The 14,000,- 
000 persons engaged in the foregoing pursuits re- 
quire the services of bankers, doctors, lawyers, 
teachers, writers, and domestic servants, who 



THE ULTIMATE UNITS 285 

must have dollars for the utilities they need in 
exchange for the services they render. From 
each individual radiates demand for utilities; to- 
ward each individual flows a supply of utilities. 
Through those responsible for the processes of 
production and sale, the waves of demand focus 
and the waves of supply radiate. Thus the en- 
tries to the debit and to the credit of the depos- 
itors on the books of banks mark the intersections 
of waves of demand and waves of supply. 

From the credits they receive, those responsible 
for production must set aside sufficient for the re- 
pair, renewal, and replacement of instruments of 
production, and must pay for insurance. At the 
the end of specified periods they must pay rental 
to the owners of property utilized under lease, 
interest for the utilization of capital for which 
they have pledged return, and dividends as profit 
is divided. 



XIX 

A SUMMAEY, EESTATEMENT AND FUKTHEK ANALYSIS 

Even though the ultimate units are not at pres- 
ent determined, they are not without a signifi- 
cance which will illumine a summary and restate- 
ment of the preceding exposition of economic 
phenomena, and lead to a deeper perception of 
their purport. 

Production, Buying, and Selling hy Individuals 

A person can not continually apply his efforts in 
production unless he have the utilities which main- 
tain the vitality from which his effort emanates; 
that is, he must have food, clothing, and shelter. 
When through the application of the effort of a 
number of his slaves a slave-holder could supply 
all of his slaves with these essentials, he could 
direct the efforts of the number not so engaged 
into other production. The despot who supplied 
all of his subjects with these essential utilities 
produced by part of them likewise could utilize the 
efforts of the number not so engaged in other pro- 
duction. Payment for the effort of slave or sub- 
ject was at the will of master or despot, who de- 

286 



SUMMARY, RESTATEMENT 287 

termined the kinds of things produced. Even 
under a regime of slavery or despotism, however, 
there tends to develop a certain exchange of 
things and services between individuals, which be- 
comes a powerful factor in overthrowing that 
regime. Whether or not the exchange of things 
and services at the will of buyer and seller be re- 
tarded by slavery and despotism, it develops from 
a stage of self-sufficiency by the production of a 
surplus over the needs of the producers. 

When there is exchange at the will of buyers 
and sellers, things of one kind are exchanged for 
things of another kind in the proportions which 
buyers are willing to pay and sellers are willing to 
accept. As a person obtains things of the kinds 
he wants in exchange for things of the kind he can 
produce to advantage, he is led to increase his pro- 
duction of things of that kind. If he can not ob- 
tain that which he wants in return for that which 
he has to sell, he will cease to produce a surplus 
above his own needs of things of that kind, or that 
surplus will be waste. As specialization extends, 
each person devotes more of his efforts to the pro- 
duction of the things he can sell to advantage and 
less to the production of the things he can buy to 
advantage. This leads those who can produce 
and sell utilities of a certain kind or kinds to ad- 
vantage to devote their efforts exclusively to the 
production of such utilities. But if they produce 
more even of these things than others will buy, the 



288 THE FLOW OF VALUE 

surplus above that which they can sell to advan- 
tage will be waste. 

The utilities they produce are the results of the 
application of their efforts, and the utilities they 
buy are the results of the application of the efforts 
of others. The results of the application of cer- 
tain proportions of effort are sold, and the results 
of the application of certain proportions of effort 
are bought. Therefore a proportion of the effort 
applied by one person has given command over a 
proportion of the effort applied by another. 

Let us suppose, by way of illustration, that of a 
certain population 100 persons have advanced to 
the exclusive application of their efforts in the 
production of Utilities Nos. 1, 2, 3, 4, and 5; that 
10 persons applying their effort 10 hours a day 
for 30 days produce 3000 units of Utility No. 1, 
each person producing 300 units ; that 20 persons 
similarly produce 4000 units of Utility No. 2, each 
producing 200 units ; that 30 persons produce 6000 
units of Utility No. 3, each producing 200 units; 
that 25 persons produce 500 units of Utility No. 4, 
each producing 20 units ; that 15 persons produce 
600 units of Utility No. 5, each producing 40 units. 

Upon the supposition that each person applies 
with the same persistency effort of the same physi- 
cal and mental quality, and that each person wants 
utilities of each kind in the same proportion, it 
follows that each person receives in return for his 
effort embodied in the utilities he produces, of the 



SUMMARY, RESTATEMENT 289 

same proportion of effort embodied in the produc- 
tion of other utilities. That is : 



The effort applied in producing 



300 units of Utility No. 1, or 

200 units of Utility No. 2, or 

200 units of Utility No. 3, or 

20 units of Utility No. 4, or 

2 units of Utility No. 5, 



is equivalent to 
the effort ap- 
plied in produc- 
ing 141 units 
as follows : 



30 units of No. 1, 

40 units of No. 2, 

.eOunitsof No. 3, 

5 units of No. 4, and 

6 units of No. 5. 



Thus the price of 300 units of Utility No. 1 is 
not merely the 141 utilities of the different kinds, 
and vice versa ; but the price of the 300 man-hours 
applied in producing 300 units of Utility No. 1 is 
the 300 man-hours applied in producing the 141 
utilities and vice versa. 

It also follows that to the production of: 

1 unit of Utility No. 1 would be required 1 man-hour 
1 unit of Utility No. 2 would be required I14 man-hours 
1 unit of Utility No. 3 would be required IV2 man-hours 
1 unit of Utility No. 4 would be required 15 man-hours 
1 unit of Utility No. 5 would be required TVs man-hours 

Therefore, for example, the price of three Utilities 
No. 1 would be two Utilities No. 3 and vice versa ; 
or the price of three man-hours applied in pro- 
ducing three units of Utility No. 1 would be the 
three man-hours applied in producing two units of 
Utility No. 3 and vice versa. 

As it is the human being who applies effort in 
that production which meets wants, and as it is the 
human being who buys utilities produced for the 
purpose of meeting wants, each measure of a util- 
ity bought is reducible to the return received for a 



290 THE FLOW OF VALUE 

measure of effort applied. Under our supposition 
each person applies : 

30 man-hours or 10 per cent, of his effort to obtain 30 units of 

Utility No. 1. 
60 man-hours or 20 per cent, of his effort to obtain 40 units of 

Utility No. 2. 
90 man-hours or 30 per cent, of his effort to obtain 60 units of 

Utility No. 3. 
75 man-hours or 25 per cent, of his effort to obtain 5 units of 

Utility No. 4. 
45 man-hours or 15 per cent, of his effort to obtain 6 units of 

Utility No. 5. 

Thus we perceive that since price is a measure of 
utilities bought, and a measure of utilities sold, 
and that since all utilities are the result of human 
effort, the underlying significance of price is that 
it is the equivalent of the proportion of effort that 
is embodied in a measure of utilities sold, and of 
the proportion of effort embodied in a measure of 
utilities bought. Therefore, as in every transac- 
tion the buyer is a seller, and the seller is a buyer, 
price is the equivalent of the respective propor- 
tions of effort, the results of which are exchanged. 
There must be a unit in terms of which this equiva- 
lent may be expressed. As there are innumerable 
gradations in the relations between effort applied 
and wants met, this unit must be used in multiples 
and in fractions. The dollar is such a unit. Man- 
hours are bought and man-hours embodied in utili- 
ties are sold, man-hours are sold and man-hours 
embodied in utilities are bought in multiples of the 
dollar and fractions of the dollar, or in measures 



SUMMARY, RESTATEMENT 291 

indicated by both multiples and fractions of the 
dollar. In different countries price is expressed 
by different units. If the man-hour have the ex- 
change ratio of one shilling, one franc, one ruble, 
or one peseta, the 15 man-hours embodied in one 
unit of Utility No. 4 would have the exchange 
ratio of 15 shillings, 15 francs, 15 rubles, or 15 
pesetas. If the man-hour have the exchange ratio 
of one dollar, one unit of Utility No. 4 would have 
the exchange ratio of $15. 

If the relations between effort applied and 
wants met at the time antecedent to that of our 
supposition had determined the price of each 
man's effort at $2 per day, the price of one unit of 
Utility No. 1 in which was embodied 1 man-hour 
would be 20 cents ; of one unit of Utility No. 2 in 
which was embodied 1% man-hours would be 30 
cents; of one unit of Utility No. 3 in which was 
embodied l^/o man-hours would be 30 cents ; of one 
unit of Utility No. 4 in which was embodied 15 
man-hours, $3 ; and of one unit of Utility No. 5 in 
which was embodied 7% man-hours, $1.50. Each 
man would receive $60 for the thirty days ' work of 
10 hours a day. He would pay $6 for 30 units of 
Utility No. 1 ; $12 for 40 units of Utility No. 2 ; 
$18 for 60 units of Utility No. 3 ; $15 for 5 units 
of Utility No. 4; and $9 for 6 units of Utility No. 5. 
Inasmuch as every utility is the result of the appli- 
cation of man-hours, it can not be gainsaid that it 
is the embodiment of man-hours which is bought 



292 THE FLOW OF VALUE 

and sold, even though buyer and seller seldom or 
never so consider it, regarding that which is the 
subject of purchase and sale only as the utility 
produced. 

With the continuance of production, buying, and 
selling, effort is applied in varying proportions 
in the production of different utilities, and the 
wants for utilities produced are in varying pro- 
portions. These varying relations between effort 
applied and wants met cause variations in prices. 
It is our supposition that the efforts of the 100 
persons were of the same quality, and that they 
were applied to the maximum of that production 
of which each was capable. If it came to be that 
there was an increased proportion of effort re- 
quired in the production of a utility of one kind, 
there would be less of effort available for the pro- 
duction of utilities of other kinds. Then there 
would be a reduction in the volume in which that 
utility was produced or in the volumes in which 
other utilities were produced. Or, if it came to 
be that any utility was wanted in larger volume, 
a greater proportion of effort would have to be 
applied in its production, with the result that there 
would be less of effort available for the production 
of other utilities. In either event each of the 100 
persons could not obtain the same number of units 
of the different utilities as before. On the other 
hand, if there was a decrease in the proportion of 
effort required in the production of a utility of one 



SUMMARY, RESTATEMENT 293 

kind, or if that utility was wanted in smaller vol- 
ume, a proportion of the effort previously applied 
in its production would not continue to be so re- 
quired, and could be devoted to other production. 
If, for example, because of a scant yield of sub- 
stance, which would mean that a greater propor- 
tion of man-hours had been applied in relation to 
the volume of substance produced, or greater 
difficulty in transforming substance, which would 
mean that a greater number of man-hours were 
applied in the transformation, there was required 
in the production of one unit of Utility No. 3, 2 
man-hours instead of li/o, and if the same number 
of persons continued in its production, its volume 
would be reduced and a smaller proportion of 
wants would be met. The production of the same 
volume of 6000 units would require the effort of 
40 persons instead of 30, leaving available for the 
production of other utilities the effort of 60 per- 
sons instead of 70. If only 30 persons continued 
to produce Utility No. 3 they would produce 4500 
units instead of 6000 as before, each person pro- 
ducing 150 units instead of 200. If each person 
so applying his effort was to obtain the previous 
price of 30 cents a unit, he would receive $45 in- 
stead of $60, and each of the 100 persons could 
buy 45 units instead of 60 units as before. If, 
however, each person producing Utility No. 3 was 
to receive the same total of credits as before he 
would receive $60 for 150 units instead of 200, 



£94 THE FLOW OF VALUE 

and therefore the price would be 40 cents instead 
of 30 cents. But even then there would be only 
45 units apiece for the 100 persons instead of 60, 
and each person would have less to expend for 
other utilities. If the 100 persons continued to 
want 60 units apiece and were to enlist the efforts 
of 40 persons in their production, each person 
would have to pay 40 cents per unit instead of 30 
cents. He would pay as much for 2 man-hours as 
he had previously paid for 1%, and the production 
of the other utilities would be diminished. 

If no greater proportion of effort than 1^/2 man- 
hours continued to be required in the production 
of 1 unit of Utility No. 3, but there was an in- 
creased demand; if, for example, each person 
wanted 66 units instead of 60, there would be a 
total demand for 6600 units instead of 6000. If no 
more than the 30 persons engaged in the produc- 
tion, and the price was bid up, for example, to 40 
cents, the result would be that only 89 persons 
could buy the 66 units apiece, and 11 persons 
would be deprived of Utility No. 3. If the in- 
creased demand at 40 cents enlisted the effort 
requisite to produce 66 units apiece, 33 persons 
would engage in the production instead of 30. 
There would be fewer persons for the production 
of the other utilities ; there could not be the same 
supply for the same number of persons. On the 
other hand, if there was a diminution in the de- 
mand for Utilities No. 3, so that, for example, each 



SUMMARY, RESTATEMENT 295 

person wanted 57 units instead of 60, the effort of 
27 persons instead of 30 would suffice to meet the 
demand. The effort of 3 persons would be dis- 
placed ; it would be liberated for utilization in the 
production of other utilities. 

Not all persons, however, would continue to 
apply effort of the same quality with the same re- 
sult. Different persons would have different de- 
grees of advantage in obtaining substance, and 
different persons would be of different degrees of 
efficiency in transforming it. Let us suppose that 
certain persons engaged in the production of each 
utility were enabled to increase their production 
by 20 per cent., so that, for example : 

In tJie production of Utility No. 1 

5 persons would produce 300 units each or 1,500 
5 persons would produce 360 units each or 1,800, 

3,300 units No. 1 
In the production of Utility No. 2 

10 persons would produce 200 units each or 2,000 
10 persons would produce 240 units each or 2,400, 



4,400 units No. 2 
In the production of Utility No. 3 

15 persons would produce 200 units each or 3,000 
15 persons would produce 240 units each or 3,600, 



6,600 units No. 3 



In the production of Utility No. 4 

15 persons would produce 20 units each or 300 
10 persons would produce 24 units each or 240, 



540 units No. 4 



In the production of Utility No. 5 

10 persons would produce 40 units each or 400 
5 persons would produce 48 units each or 240, 



640 units No. 5 



S96 THE FLOW OF VALUE * 

If the demand of the 100 persons continued to 
be for no more than 3000 units of Utility No. 1, 
the five more efficient producers, in order to sell 
their product in competition with the less efficient, 
might ofPer it at 18 cents, and thus each of them 
would receive $64.80. Certain buyers would still 
have to pay 20 cents each for 1200 units, or $240. 
This would be only sufficient to maintain in pro- 
duction 4 of the 5 of the less efficient. The 100 
buyers would pay $1564 for the 3000 units instead 
of $1600; 9 persons would be supported in their 
production instead of 10. Similarly there might 
be paid 28 cents for 2400 units of Utility No. 2, 
and 30 cents for 1600. The efficient producers 
would receive $66.20 apiece instead of $60; the 
buyers would pay $1152 instead of $1200 for 4000 
units, which would be produced by 18 persons in- 
stead of 20. And so also with the other utilities. 
The same totals of the respective utilities might 
be produced by 91 persons instead of 100. 

As producers could not sell utilities except to 
those who could buy them, when it came about that 
91 persons produced Utilities Nos. 1, 2, 3, 4, 5, in 
the volumes that had previously met the wants of 
100 persons, not only would there be 9 fewer per- 
sons engaged in the production but there would be 
9 fewer persons who could buy the utilities pro- 
duced. As the utilities would be produced for 100 
persons, the 9 persons displaced could apply their 
efforts in the production of other utilities for 



SUMMARY, RESTATEMENT 297 

which they could find sale, or they might be em- 
ployed by the efficient producers who could pay 
them with their surplus. 

The foregoing examples lead to the deductions 
that as a person's effort contributes in greater 
degree to meeting the wants of others, his wants 
are met in greater degree by the results of the 
efforts of others, and that as a person's effort 
contributes in less degree to meeting the wants of 
others, he receives in smaller degree of the results 
of the effort of others. A proportion of effort 
applied gives command over another proportion 
of effort applied. The application of a certain 
number of man-hours of a producer of utilities 
may give him command over a greater number of 
man-hours of one less efficient, or over a smaller 
number of man-hours of one more efficient. As 
man-hours become more effective they give com- 
mand over a greater number of man-hours of the 
less effective. The man-hours of the progres- 
sively less effective give command over smaller 
and smaller proportions of the man-hours of 
others. The degrees in which man-hours applied 
in the production of a utility of one kind give com- 
mand over man-hours applied in the production 
of utilities of other kinds find expression in price : 
variations in prices indicate variations in the 
command of man-hours over man-hours. 

The effectiveness of effort is not to be measured 
solely by the relative volume of production. A 



298 THE FLOW OF VALUE 

person of especial proficiency, and specialized skill 
and training in the production of a utility of un- 
usual quality, may in return for the application 
of a given proportion of his man-hours receive 
command over a far greater proportion of the 
man-hours of others. Similarly, if a utility be 
constituted of a substance that is rare, or difficult 
of attainment, as gold, a pearl, or ivory, a success- 
ful prospector, diver, or hunter may obtain in re- 
turn for the proportion of his man-hours applied 
in its production command over far greater pro- 
portions of the man-hours of others. 

Thus we perceive a distinction which may be 
recognized by according a differing significance to 
** efficiency'' and '* effectiveness.'' The efficient 
producer is he who can produce a greater volume 
of utilities of a given kind and quality in a given 
time. The effective producer is he who can in 
return for his effort or the results of his effort 
obtain greater command over the efforts of others ; 
that is, the higher price. For example, of two 
persons of equal physical and mental equipment 
and working with equal persistency, one may pro- 
duce utilities for which the demand is relatively 
low and the other utilities for which the demand is 
relatively high. The former would receive lower 
prices for his product than the latter ; that is, less 
command over the effort of others. Thus these 
two producers of equal efficiency would be of un- 
equal effectiveness; the man-hour of the latter 



SUMMARY, RESTATEMENT 299 

would bring greater command over the man-hours 
of others than the man-hour of the former. 

A man, whatever the degree of his efficiency, will 
not, other things equal, apply his effort in the pro- 
duction of a given utility if he can obtain greater 
reward, that is greater command over the efforts 
of others, by applying it in the production of an- 
other utility. Therefore the tendency is for the 
available aggregate of effort to become appor- 
tioned in the production of the utilities of the dif- 
ferent kinds, so that persons of equivalent effi- 
ciency tend toward equivalent effectiveness. This 
is true, notwithstanding that in the actual proc- 
esses of industry and commerce the working of 
this tendency to this end is often interrupted and 
impaired. 

Production hy Organizations of Employer and 

Employees 

There are the internal wants of the body which 
are met by the pabulum that passes through the 
mouth; there are the external wants of the body 
for immediate protection that are met by the vari- 
ous articles of apparel, and for less immediate 
protection that are met by various forms of shel- 
ter with light, heat, and other accompaniments. 
There are divers wants of the senses and the intel- 
lect. As with extending knowledge the wants of 
the body, the senses, and the intellect develop, 
there come to be those who seek to obtain satisfac- 



SOO THE FLOW OF VALUE 

tion of their own wants by supplying these devel- 
oping wants of others. Individuals, and organiza- 
tions of employer and eniployee, will specialize in 
every phase of production that leads to the pro- 
duction of final utilities — in particular phases of 
producing substance, of transforming substance 
into intermediate utilities, and of transforming 
intermediate utilities into a variety of final utili- 
ties. After industrial and commercial develop- 
ment has passed the earlier stages there is always 
such specialization. To the production of final 
utilities at the place where they pass into the pos- 
session of the final purchasers is involved the ap- 
plication of effort in a series of processes, the 
application of infinite subdivisions of the effort of 
innumerable persons. This application in in- 
creasing degree comes to be through organizations 
of employer and employees. 

The apportionment of effort in its divisions and 
subdivisions in various phases and various stages 
of production is determined by the elementary 
principle that, in seeking to satisfy their wants, 
men will part with as little as they can to obtain 
that which they want, and will obtain as much as 
they can for that with which they part. If a man 
can obtain more by applying his effort as an indi- 
vidual producer and selling his product than by 
working for wage, he will so apply his effort; if 
he can obtain more by working for wage he will 
do so ; if he can obtain more by applying his effort 



SUMMARY, RESTATEMENT 301 

in directing and coordinating the efforts of others 
and selling the results of their combined efforts, 
he will be an employer. Thus it is that, as a rule, 
a man will seek to apply his effort in the way that 
will lead to the greatest degree of satisfaction of 
his desires. 

The manner of the application that will lead to 
that satisfaction is determined by the extent to 
which others want the results of his effort. There 
are limits to the range of production in which any 
person may apply his efforts, but within that 
range each person will seek to apply them in the 
way that will give him the greatest measure of 
return. As those who have the inclination and 
the capacity to become employers are relatively 
few in relation to those without the capacity or 
without the inclination, the proportion of employ- 
ers is far less than the proportion of those who 
work for wages. 

When production is through the coordination of 
effort by organizations of employer and employees, 
effort is applied and coordinated under the direc- 
tion of the employers. They are responsible for 
its application in the production of utilities, and 
they are responsible for the sale of the utilities 
produced. Each organization applies force-units 
resulting from the rnan-hours of employer and 
employee. All of the man-hours applied in pro- 
duction, whether of employer or employee, are 
applied toward the production of final utilities. 



302, THE FLOW OF VALUE 

In the total volume of a final utility of any kind is 
embodied the total man-hours applied toward its 
production : in the aggregate volume of final utili- 
ties of all kinds is embodied the aggregate of man- 
hours applied toward their production. 

The employee sells man-hours. The employer 
sells the results of the man-hours applied by him- 
self and his employees to and through the utilities 
which he utilizes in production, and these utilities 
have been produced by the application of man- 
hours in the past. Therefore, tlie employer sells 
the results of the application of a total of man- 
hours. 

The utilities which the employee buys are 
bought with his man-hours, or rather with the 
credits he receives in return for applying his man- 
hours. The utilities which the employer buys, 
whether man-hours immediately applied, or the 
results of man-hours to which they are applied, 
are bought with the results of the application of 
man-hours, or rather with the credits he receives 
in return for the sale of such results. 

As it is the man-hours available in the present 
which must be applied toward future production, 
and it is only by final utilities that are maintained 
the man-days from which man-hours emanate, it 
follows that the results of man-hours applied in the 
past in the form of final utilities must pay for the 
man-hours applied in the present toward the pro- 
duction of final utilities. Therefore, whatever be 



SUMMARY, RESTATEMENT 303 

the intervening phenomena in effectuating pay- 
ment, it essentially is that in the continuity of 
production the results of man-hours applied in 
the past pay for man-hours applied in the present, 
and man-hours applied in the present pay for the 
results of man-hours applied in the past. And so 
also the results of man-hours applied in the pres- 
ent will pay for man-hours applied in the future. 
Therefore, it ultimately is that man-hours applied 
in the past pay for man-hours applied in the pres- 
ent, and that man-hours applied in the present pay 
for man-hours applied in the future. 

Man-hours and Want-units 

As the payment of man-hours for man-hours is 
effected by final utilities, the ultimate significance 
of the dollar is the relation of the effort put forth 
by the individual to the wants of the individual; 
that is, the relation of man-hours to want-units. 
If a man will not expend any portion of the dollars 
received by him for want-units of a given kind, 
want-units of that kind will not give command 
over any portion of his man-hours. If want-units 
of a given kind can not be sold for any proportion 
of man-hours, they will have no ratio to the dollar. 
If the total volume of a utility of any kind can not 
be sold for a number of dollars equivalent to that 
expended for the man-hours applied in its produc- 
tion, the production of that utility will diminish; 
fewer man-hours will be applied in the transf orma- 



304 THE FLOW OF VALUE 

tion of intermediate utilities into that final utility; 
fewer man-hours will be applied in the transforma- 
tion of substance into intermediate utilities for 
transformation into that final utility; and fewer 
man-hours will be applied in the production of sub- 
stance for transformation into intermediate utili- 
ties for transformation into that final utility. On 
the other hand, if final purchasers pay a portion 
of the dollars received by them for a final utility, 
want-units of that kind give command over a por- 
tion of their man-hours. There can not be sold 
more of want-units to-day than have been pro- 
duced in the past. There can not be applied more 
of man-hours to-morrow than can be maintained 
by the want-units in existence to-day. As all ef- 
fort applied in the past has been toward the pro- 
duction of final utilities, and the tendency has been 
toward the production of a larger volume in rela- 
tion to the effort applied, it follows that the wants 
essential to the application of productive effort by 
all whose efforts are required in production can 
adequately be met unless the application of effort 
in the past has been out of proportion, or unless 
there has been a sudden and overwhelming de- 
struction of utilities produced, or unless there has 
been a sudden and overv/helming increase in the 
population whose wants must be supplied by the 
utilities produced. 

All of dollars to credit have been derived from 
the sale of man-hours in the past, or from the 



SUMMARY, RESTATEMENT 305 

sale of the results of man-hours applied in the 
past, at ratios to the dollar that have been deter- 
mined by interrelations between supply and de- 
mand at the time of sale. The measures of want- 
units which will have the exchange ratio of a dol- 
lar at a future time will be determined by the inter- 
relations between the supply of and the demand 
for want-units of the various kinds at that time. 
The measures of man-hours which will have the 
exchange ratio of a dollar at a future time will be 
determined by the interrelations between the sup- 
ply of and demand at that time for effort of the 
various grades of efficiency to be applied in the 
respective phases of production. 

If there are a greater number of man-hours, in 
relation to the demand for them, seeking sale at 
one time than at the preceding time; that is, if 
there are a greater number of wage-workers seek- 
ing employment in relation to the number the em- 
ployer wants to employ — he will endeavor from 
the credits at his command to pay fewer dollars 
as wages. If a smaller number of wage-workers 
are seeking employment than the employer wants, 
he may from his credits be obliged to pay more 
dollars as wages. 

If with the same number of man-hours for which 
he has paid a greater number of dollars an em- 
ployer can produce no greater number of want- 
units, his cost of production expressed in dollars 
will be increased. If for the want-units produced 



306 THE FLOW OF VALUE 

he could obtain no higher price expressed in dol- 
lars, he would not have command over the same 
number of man-hours in further production. 

If with the same number of man-hours for which 
he paid a smaller number of dollars an employer 
produced the same or a greater number of want- 
units, the cost of production expressed in dollars 
would be diminished. If for the want units pro- 
duced he obtained the same or a higher price ex- 
pressed in dollars, he would receive command over 
a greater number of man-hours to be applied in 
future production. 

Essentially the employee sells man-hours and 
buys want-units. If there are a greater number 
of want-units seeking sale, in relation to the 
number the employee wants, at one time than 
at the preceding time, he may pay fewer dollars 
for the same supply as before. The man-hours 
applied by him have given him greater command 
over want-units. If a smaller number of want- 
units, in relation to the number the employee 
wants, are seeking sale at one time than at a pre- 
ceding time, he may pay more dollars for them. 
The man-hours applied by him have given him less 
command over want-units. If for the man-hours 
the employee sells at any time he can buy more of 
want-units than at a preceding time, and he does 
not increase his purchase of want-units to the full 
extent of his increased command over them, he can 
invest the remainder of his command in produc- 



SUMMARY, RESTATEMENT 307 

tion by others, and thus either directly or indi- 
rectly become an employer himself. He has se- 
cured gain which is of the nature of profit. If for 
the man-hours he sells at a given time he can not 
obtain so many want-units as at the preceding 
time, he may be obliged to reduce his standard 
of living. If the want-units previously received 
were no more than necessary to maintain his vi- 
tality, those now received will not be sufficient to 
maintain his vitality. Thus it is to the advantage 
of the employee that he receive the greatest meas- 
ure of want-units in relation to his man-hours, 
and therefore that there be the greatest volume 
of production in relation to the effort applied. 

If there is not an increase in production in re- 
lation to the effort applied, but the wage-workers 
in any kind of production demand and obtain a 
greater command over want-units, the employer 
will have to transfer to them a greater proportion 
of the credits received by him from the sale of 
the utilities produced. He, therefore, will not 
have the same command over man-hours to be 
applied in increasing that production or for fur- 
thering production of other kinds. Unless the 
wage-workers invest in production a portion of 
the increased wages, so that the total investment 
constituted of their wages and employer's profit is 
equal to the total that otherwise would have been 
invested, the production in which their efforts are 
applied will diminish, and many who would other- 



308 THE FLOW OF VALUE 

wise buy utilities of the kinds produced will be 
deprived of them. If the employers so advance 
the price expressed in dollars for utilities pro- 
duced that they obtain the same command over 
man-hours as before, many who had bought util- 
ities of that kind would have to diminish their 
purchases of them or of other utilities. Thus the 
wage-workers engaged in the production of other 
utilities would be deprived because of the advance 
in the wages of the wage-workers engaged in the 
production of the utilities of those kinds. 

If, however, the production of a utility has in- 
creased in relation to the number engaged, a given 
number of man-hours has produced a greater num- 
ber of want-units. If the production of several 
utilities has increased in relation to the number 
engaged, there has been an increase in the want- 
units of each kind in relation to the man-hours. 
The tendency will be for their prices to fall, so 
that the same number of dollars can buy them in 
larger measures. Moreover, as an increased vol- 
ume of want-units can maintain a greater number 
of man-days, the effort of an additional number 
of persons can be applied in the further produc- 
tion of those utilities or in the production of other 
utilities. 

As all productive effort is applied toward the 
production of final utilities, it is clear that the 
employer really buys man-hours and sells want- 
units. Want-units, so considered, include the 



SUMMARY, RESTATEMENT 309 

units of the earlier stages of production that are 
transformed into want-units. With the credits 
obtained for want-units sold the employer buys 
man-hours for application toward the production 
of further want-units. If the same number of 
man-hours is required to produce the same vol- 
ume of want-units, and he does not obtain as much 
for the want-units sold as will enable him to buy 
the same number of man-hours to be applied in 
further production, he has incurred loss. If for 
the want-units sold he obtains more than sufficient 
to buy the same number of man-hours to be ap- 
plied in further production, he has secured profit. 
This means that while the total of man-hours 
paid by final purchasers for a final utility pay for 
all of the man-hours applied in its production, the 
total of man-hours paid may not be the same as the 
total of man-hours applied. If the total of man- 
hours applied exceeds the total of man-hours re- 
ceived, employers, other things equal, have in- 
curred loss. If the total of man-hours received 
exceeds the total of nian-hours applied, employers, 
other things equal, have received profit. This sur- 
plus of man-hours, or rather this increased com- 
mand over man-hours, may flow in different pro- 
portions to employers who have produced the final 
utility, to employers who have produced the inter- 
mediate utilities transformed into it, to employ- 
ers who have produced the substance transformed 
into the intermediate utilities which have been 



310 THE FLOW OF VALUE 

transformed into the final utility, to employers 
who have produced the instruments of production 
utilized in various stages of the transformation. 

If an employer succeeds in reducing the ratio 
of man-hours applied to want-units produced, he 
still must obtain as much for the want-units sold 
as will enable him to buy the man-hours requisite 
to the further production of that volume. Thus 
the incurring of loss or the securing of profit de- 
pends not alone upon the ratio of man-hours ap- 
plied to want-units produced, but upon what the 
employer has to pay for the man-hours and what 
he obtains for want-units. 

As a man will not work for wages if he can ob- 
tain a greater total of credits as an employer, an 
employer may debit his total of credits not only 
with the wages he pays his employees, but with 
wages for himself in the amount he could receive 
as an employee. The surplus of credits over his 
total of debits will be his profit. He will not con- 
tinue in production as an employer unless he can 
obtain credits over and above what he could earn 
as wages. 

As a population is of lower average efficiency in 
production, the fewer will be the want-units in 
relation to the ruan-hours applied. As its aver- 
age efficiency increases there will be a greater 
number of want-units in relation to the man-hours 
applied. As the supply of utilities increases in 
greater proportion than those seeking employ- 



SUMMARY, RESTATEMENT 311 

ment, even the least efficient wage-workers will 
receive more of want-units. The greater the pro- 
portion of those of low efficiency, the smaller will 
be the production of utilities and the smaller the 
proportion received by each person, especially 
by the less efficient. The greater the proportion 
of those of high efficiency, the greater will be the 
production of utilities and the greater the propor- 
tion received by each person, especially by the 
more efficient. 

Rising and Falling Prices 

When the seller obtains and the buyer pays a 
greater number -of dollars for a given measure of 
a utility than theretofore, its price has risen, if 
the ratios of other utilities to the dollar have not 
changed. It rises because the effort applied in 
the production of that measure of that utility 
has given command over a greater proportion 
than theretofore of effort applied in the produc- 
tion of other utilities. When the seller obtains 
and the buyer pays a smaller number of dollars 
for a given measure of a utility, its price has 
fallen, if the ratios of other utilities to the dollar 
have not changed. It falls because the effort ap- 
plied in the production of that utility gives com- 
mand over a smaller proportion than theretofore 
of effort applied in the production of other utili- 
ties.. 

A rise or a fall in the price of any utility is a 



312 THE FLOW OF VALUE 

changed relation between the purchasing power 
of the total effort applied in the production of 
that utility, and the purchasing power of the total 
effort applied in the production of other utili- 
ties. Fluctuations in prices, in wages, and in 
profit signify changing relations in the command 
of certain proportions of effort over other pro- 
portions of effort. If the proportions of effort 
applied in producing respective measures of sev- 
eral different utilities decrease, a greater num- 
ber of want-units of each kind will be produced 
by the same number of man-hours. Other things 
equal, the price of the man-hours increases because 
in return for them are received greater measures 
of want-units ; and, vice versa, the price of a want- 
unit decreases because it will buy a smaller pro- 
portion of man-hours. As man-hours emanate 
from the human being, the higher their price, 
measured by the want-units obtainable for them, 
the greater may be the kinds and proportion of 
utilities that the human being may purchase. On 
the contrary, if increased proportions of effort are 
required in the production of respective measures 
of several different utilities, a smaller number of 
want-units of each kind will be produced by the 
same number of man-hours. Other things equal, 
the price of the man-hour falls because smaller 
measures of want-units can be obtained for it, 
and the price of the want-unit rises because larger 
measures of man-hours have to be paid for it. 



SUMMARY, RESTATEMENT 313 

If the price of a utility continues to rise, the 
purchases of that utility will be progressively less 
and less as those with a descending scale of cred- 
its decrease their purchases, or else their pur- 
chases of other utilities will be less and less. 
They will progressively diminish their purchases 
of those utilities which are of the least relative im- 
portance to them. Thus if the utility, the price of 
which has risen, be an essential utility, their pur- 
chases of it may not diminish ; if it be a less essen- 
tial utility their purchases of it will diminish. If 
the purchases of the least and the less essential 
utilities continue to diminish, employers engaged 
in their production will discharge the less efficient, 
that is the marginal employees ; and ultimately the 
least efficient, that is the marginal employers, will 
be forced out of their production. 

A fall in the price of a utility may mean that 
there has been a decrease in the number of man- 
hours required to produce one want-unit, and 
therefore a smaller number of persons are re- 
quired in the production of a given volume. If, 
however, for the volume so produced there is the 
same relative demand or a greater relative de- 
mand, there may be no diminution in the price 
expressed in dollars. In this case the results of 
man-hours applied under the direction of employ- 
ers will give theni command over a greater number 
of man-hours. If, however, competing employers 
increase production to the capacity of their organ- 



314 THE FLOW OF VALUE 

izations, competition between them will reduce the 
price expressed in dollars, and ultimately there 
will be eliminated the number of persons in excess 
of those required to produce the volume for which 
there is demand at prices that will enable them to 
continue in the production. Or a fall in the price 
expressed in dollars of a utility may mean that 
there is a decreased demand in relation to the 
volume produced, whether in its production were 
applied a greater or a less proportion of effort 
than before. If the price expressed in dollars of 
a utility continues to fall, purchases of it may 
increase, but at the lower price expressed in dol- 
lars the credits to employers may so decrease 
that they can not pay the same wages as before. 
Less efficient employees will be discharged, and 
ultimately less efficient employers will be driven 
out of the production. This will continue until 
the volume produced by the remaining employers 
and employees brings the prices expressed in dol- 
lars that will enable them to continue in the pro- 
duction. 

The Distinction Between Capital and Labor 

The employee supplies nothing but his man- 
hours. The employer provides the means for their 
application, and directs and coordinates their ap- 
plication. As the employee will not work for a 
given wage if he can make a better living other- 
wise, it is a function of the employer to provide 



SUMMARY, RESTATEMENT 315 

means for the application of the effort of the 
employee and so to direct its application that he 
may be enabled to pay him at least as high a wage 
as he could otherwise obtain. At the same time 
the employer undertakes to supply purchasers with 
the utilities he produces at prices at least as low 
as those at which they could buy other utilities of 
the same kind and quality. That is, the employer 
undertakes to provide his employees with as great 
command over the efforts of others as they could 
otherwise obtain, to sell the results of effort to pur- 
chasers at prices as low as those for which they 
could otherwise obtain utilities of the same kind 
and quality, and to secure for himself as profit 
greater command over the efforts of others than 
he could otherwise secure. As the extension of 
specialization and coordination necessarily means 
an increase in the proportion of production that 
is effected by organizations of employers and em- 
ployees, it follows that to an increasing degree it 
becomes the function of the employer not only to 
provide the means for those to apply their effort 
who work in the present, but also to provide the 
means for those to apply their effort who will work 
in the future. 

The means for the application of effort provided 
by the employer consist of the results of man- 
hours embodied in that which is transformed into 
final utilities, and in that by means of which the 
transformation is effected. That is, the employer 



316 THE FLOW OF VALUE 

provides the results of man-hours applied in the 
past which are utilized in present production. 
These constitute business capital, that which is 
commonly designated as capital. The man-hours 
applied in the present for which wages are paid 
are labor. As all utilities are produced by the 
application of man-hours in the present to and 
through the results of man-hours applied in the 
past, it follows that under the conditions of civil- 
ization there could not be production without the 
application of man-hours in the present, which is 
labor ; nor without the utilization of the results of 
man-hours applied in the past, which is capital. 
The greater the volume of capital in relation to 
labor — that is, the greater in relation to each em- 
ployee the extent and productivity of sources of 
substance, the greater the number and capacity 
of instruments of production, and the greater the 
volume of intermediate utilities — the greater may 
be the volume of final utilities to the production 
of which the effort of each employee may contrib- 
ute, and therefore the greater the volume for meet- 
ing the wants of all persons. 

The employer is responsible for directing and 
coordinating man-hours applied in the present, 
that is labor, in application to and through the re- 
sults of man-hours applied in the past, that is 
capital, toward the production of utilities giving 
command over a greater number of man-hours 



SUMMARY, RESTATEMENT 317 

to be applied in the production of an increased 
volume of final utilities to meet the wants of an 
increasing population; and the employer is also 
responsible for obtaining an increase of the cap- 
ital that will enable this increased volume of util- 
ities to be produced. The command over man- 
hours which enables this increased production is 
profit. 

Wage is return received for man-hours applied 
in the present. Rent and interest are return for 
the right to utilize the results of man-hours ap- 
plied in the past. Profit is the surplus of credits 
received over debits incurred in the application 
of man-hours in the present to the results of man- 
hours applied in the past. Thus rent is profit to 
the owner of property that has been leased, and 
interest is profit to the investor of accumulated 
credits upon security. But as the profit of the 
employer is the surplus of credits received over 
all debits incurred in production, rent and inter- 
est are part of his expense. His profit is that 
surplus of credits received over all debits in- 
curred which gives command over man-hours to 
be applied in future production. 

Wage paid to an employee for applying effort, 
for the application of which and for the results 
of which the employer is responsible, differs from 
the fee, which is paid for service, the responsibil- 
ity for which rests with him who renders it; and 



318 THE FLOW OF VALUE 

it differs from the salary, which is paid by the 
investors of capital to those who direct and are 
responsible for its utilization. 

Upon the efficiency and effectiveness of employ- 
ers depends the payment of wages, the adequate 
and satisfactory meeting of the wants of all per- 
sons, and also the return upon his investment 
that accrues to the investor. 

The Securing of Profit 

Toward securing the greater profit the employer 
will endeavor to dispose of the total volume of his 
product for the number of dollars that will yield 
the greatest surplus over the number of dollars 
expended in its production. Other things equal, 
the greater the surplus, the greater will be his com- 
mand over man-hours. He may sell the entire 
volume at the same number of dollars per unit, 
or he may obtain a greater number of dollars per 
unit for part of his production than he can obtain 
for other parts of his production. He may apply 
the total of effort for which he pays wages in pro- 
ducing a utility of one kind and one grade, or in 
producing a utility of one kind in various grades, 
or in producing different kinds of utilities per- 
haps of various grades, which he may sell at dif- 
ferent prices expressed in dollars per unit to va- 
rious purchasers. This means that an employer 
will desire buyers for every want-unit he produces 
at that price in dollars which will augment his 



SUMMARY, RESTATEMENT 319 

profit. Therefore as the volume of production in- 
creases in relation to the effort applied, utilities 
of the various grades may be sold at the decreas- 
ing prices in dollars per unit that enable them to 
be purchased farther and farther down the de- 
scending scale of incomes. 

The employer will estimate as nearly as he can 
the debits incurred per unit for each grade of the 
utilities produced, and thus will arrive at the 
average cost per unit of production. If he can 
sell one grade at a price that will give him a 
greater margin over the cost of production than 
the price he obtains for other grades, he will ex- 
pand his production of that grade until the price 
so declines that it gives him no greater margin 
than he obtains from the sale of other grades. 
He will endeavor to produce various grades in the 
respective volumes for which he obtains the prices 
that yield the greatest margin over the cost of 
production. As the demand for any particular 
grade so diminishes that the price does not yield 
a margin over the cost of production, he will dis- 
continue that grade. As different employers come 
to be more efficient in producing a utility of a 
particular grade, they will obtain a higher margin 
of profit than those less efficient and thus will be 
led to increase their volume of production of that 
grade. Thus there will come to be specialization 
in the production of the respective grades. This 
specialization may be under the direction of one 



SW THE FLOW OF VALUE 

employer who pays a salary to a manager in 
charge of each phase of specialization, or a par- 
ticular phase may be under the direction of a 
separate employer. 

To the extent that the dollars obtained for each 
increment of production enhance their profit, em- 
ployers will seek to increase their production. To 
this end they will increase the number of their 
employees. While it is those who are most effi- 
cient in directing and coordinating the efforts of 
others who contribute in greatest degree to the 
volume of production and therefore, other things 
equal, to profit, it is also true that there are essen- 
tial the employees whose efforts are directed and 
coordinated. Therefore as long as increases in 
the volume of production enhance profit, the em- 
ployer will increase the number of his employees, 
not only by securing the services of those who 
direct and coordinate but of that number whose 
efforts can be directed and coordinated by them to 
advantage. Thus as an increased volume sold at 
a descending scale of prices enhances his profit, 
such an increase tends not only to place a utility 
within the reach of those of lower and lower in- 
comes, but it tends also to give employment to 
a greater and a greater number not only of the 
more efficient but of the less efficient employees. 

At equal wages, the employer will desire the 
services of the more efficient employee. Or he 
may pay the more efficient a higher wage than the 



SUMMARY, RESTATEMENT 321 

less efficient, especially if the efficiency be in 
greater ratio than the wage. If the efforts of two 
men are more efficient than those of three other 
men, or if the efforts of three men are more effi- 
cient than those of ^ve other men, the employer 
will at the same rate of wages employ the two 
men instead of the three, the three instead of the 
five. Or he may be willing to pay a higher rate 
of wages to the two men than to the three, or to 
the three than to the five. To one with the ca- 
pacity for directing and coordinating the efforts 
of others he may be willing to pay a wage com- 
mensurate with the increase in the volume of pro- 
duction due to his efforts. The wages paid em- 
ployees of whatever grade of efficiency must en- 
able them to buy want-units of various kinds in 
various proportions. If the number of employees 
of any grade of efficiency is so large that they will 
be obliged to work for the lowest wage that will 
maintain their vitality, employers will pay them 
that wage. The want-units they buy will be of the 
essential utilities in their crudest and simplest 
forms, and they will pay for them the fewest dol- 
lars for which they can be obtained. Employers 
will sell these utilities in their crudest and simplest 
forms at the lowest prices expressed in dollars 
which will enhance their profit. That is, mar- 
ginal employees will receive marginal wages, and 
will obtain marginal utilities at marginal prices. 
Through specialization and coordination even 



S22 THE FLOW OF VALUE 

these marginal utilities can be produced in in- 
creasing volume in relation to the effort applied 
in their production. As organizations of em- 
ployer and employees can utilize substance which 
otherwise would be wasted, in the production of 
crude and simple utilities, they may find that the 
effort required in their production is but a slight 
addition to the effort which they apply in the 
production of similar utilities of higher grades. 

As every person capable of applying his effort 
in production can contribute toward meeting the 
wants of others, and has wants that can be met 
by the efforts of others, it follows that if at all 
times the aggregate of the available effort were 
so apportioned that each person contributed to 
the production of utilities which others wanted, 
he would in exchange for the results of his effort 
receive of the results of the efforts of others which 
he wanted, and therefore no one able to work 
would need to be without employment. In periods 
of prosperity there is a close approximation to 
such an equilibriuni : it is otherwise in periods 
of depression. 

As profit of employers and savings of em- 
ployees, which are of the nature of profit, are 
exerted in command over man-hours in further 
production, the greater may be the volume and 
variety of final utilities produced, and the greater 
may be the number and capacity of instruments 
of production by means of which final utilities in 



SUMMARY, RESTATEMENT 323 

augmented volume and variety may be produced. 
As with extending knowledge there is the inven- 
tion and construction of more efficient instruments 
of production, yet the greater is the volume and 
variety of final utilities that may be produced in 
relation to the effort applied in production, and 
thus the greater the command over final utilities 
that may pass to all who so apply their effort. 

The greater the volume and variety of final 
utilities produced in relation to the effort applied, 
the greater is the proportion of final utilities that 
may be devoted to the maintenance of those who 
prepare the coming generation for future useful- 
ness, of those who practise the professions and the 
arts, of those who engage in the extension of 
knowledge and in giving that extended knowledge 
application toward the welfare of mankind. 

The greater the volume and variety of final 
utilities produced in relation to the effort applied, 
the greater may be the number of the helpless, the 
aged and the infirm who may be maintained and 
the comfort in which they may be maintained ; the 
greater may be the number of the worthy in- 
digent, and of the unworthy indigent, of the phys- 
ically, mentally, and the morally defective who 
may be maintained. 

The greater the volume and variety of final 
utilities produced in relation to the effort applied, 
the greater the return that may pass as rent, in- 
terest, or profit for the right to the utilization 



SM THE FLOW OF VALUE 

of accumulated credits, even to those who do not 
apply their efforts in production. They may lead 
lives of usefulness, even of surpassing usefulness, 
because of freedom from the cares of making a 
living, or they may lead lives of unworthy in- 
dulgence. 

When Each Person Receives of the Results of the 
Effort of Others in the Proportion That He 
Contributes to Meeting the Wants of Others, 
He is Not Depriving Another if, Because of 
Contributing in Greater Degree, He Receives 
Greater Reward 

When an individual producer sells the results 
of his efforts he obtains as much as he can for 
them. This means that he sells the results of his 
efforts to the buyer who will pay at least as much 
for them as he could obtain from any other buyer. 
If one individual produces more things of a kind 
than another and obtains more for his larger total 
of production than the less efficient obtains for his 
smaller total of production, he is not depriving 
the less efficient producer. His man-hours have 
resulted in the production of a greater number 
of want-units of that kind for which he receives 
a greater command over want-units of other kinds, 
and therefore over a greater proportion of the 
effort of others, over a greater number of man- 
hours. If one individual produces things of a 
kind that are wanted more than things of 



SUMMARY, RESTATEMENT 325 

another kind produced by another individual, and 
he therefore obtains greater command over util- 
ities in exchange for them, he is not depriving the 
less effective producer. He has contributed in 
greater degree toward meeting the wants of 
others. His man-hours have resulted in the pro- 
duction of want-units of a kind for which buyers 
are willing to pay more than for the want-units 
produced by the less effective. Thus in return 
for these want-units he receives a greater com- 
mand over want-units, a greater command over 
man-hours. It is likewise with organizations of 
employer and employees. When an employee re- 
ceives as much for his efforts as any employer 
will pay he has sold his man-hours for as much 
as can be obtained for them, and the employer has 
paid as much as he would pay any one for man- 
hours of similar quality and efficiency. If another 
employee of greater efficiency receives more for 
his man-hours, the less efficient employee has not 
been deprived. He has received for his efforts the 
most that any one would pay him. Likewise if 
an employee, whose efforts are of a quality which 
causes them to be wanted more than the efforts 
of another, and if an employer is willing to pay 
more for his efforts than for the efforts of the 
other, the other is not being deprived. 

If an employer receive more for the utilities 
for the production of which he is responsible than 
is required to pay the wages of his employees, no 



826 THE FLOW OF VALUE ♦ 

one of his employees is being deprived, provided 
the wage he receives is as high as another em- 
ployer wonld pay him. The employer has secured 
profit, not by depriving his employees, but by 
directing and coordinating their efforts to more 
effective results than otherwise could be obtained. 

If an employer so directs and co5rdinates the 
efforts of his employees that he produces a greater 
volume of utilities of a given kind in relation to 
the effort applied than does another employer, 
and he therefore receives a greater total of cred- 
its, he is not depriving the other employer. Be- 
cause of his greater efficiency he obtains greater 
profit. He has contributed in greater measure to- 
ward meeting the wants of others and has received 
greater return. 

If an employer so directs and coordinates the 
efforts of his employees in the production of util- 
ities of a kind that are wanted more than utilities 
of another kind, even though produced by the 
same total of man-hours of the same efficiency, 
and he therefore receives more for them, he is not 
depriving the other employer. He has been re- 
sponsible for producing utilities that contribute 
in greater degree toward meeting the wants of 
others, and therefore receives greater return for 
the effort applied in their production. If from a 
source of substance a producer can obtain so much 
greater yield in relation to the man-hours applied 
than can be obtained from another source of sub- 



SUMMARY, RESTATEMENT Sn 

stance by another producer whose substance is 
required, he will at the same price per unit or 
for the total volume of substance receive greater 
command over man-hours than the other producer, 
who is not thereby being deprived. 

If through the utilization of an instrument of 
production can be produced a greater volume of 
intermediate utilities or of final utilities for which 
can be obtained the same price per unit or a 
greater price for the total volume, than can be 
obtained through the utilization of another instru- 
ment of production whose product is required, the 
owner will receive greater command over man- 
hours than the other producer, who is not thereby 
being deprived. 

When, under conditions that impose no ham- 
pering restrictions upon production, buying, and 
selling, the employer obtains profit, he is not de- 
priving the purchasers of utilities. That which 
all buyers pay for final utilities is command over 
man-hours. The employer seeks to produce util- 
ities with the application of fewer man-hours than 
those over which he has command, to obtain com- 
mand over a greater number of man-hours than 
he has applied. When through the efficient direc- 
tion and coordination of the application of effort 
he succeeds in so doing, he has obtained profit. 
This increasing command over man-hours is due 
to the efforts of the employers who produce util- 
ities, and not to those who buy the utilities pro- 



328 THE FLOW OF VALUE 

duced. When all of those immediately applying 
their effort in production under conditions that 
impose no hampering restrictions upon produc- 
tion, buying, and selling obtain for their man- 
hours that return which is determined by the in- 
terrelations between supply and demand, they 
have obtained the fullest command over final util- 
ities which any one will pay them. When the 
employer saves man-hours in production they are 
not being deprived, nor are they being deprived 
because of the proportion of the man-hours saved 
that passes as profit, rent, or interest. There- 
fore they are not being deprived when command 
over man-hours thus obtained is expended for 
final utilities. The portion of the command over 
man-hours thus accruing that is reinvested in pro- 
duction passes to those immediately applying 
their effort, who thus benefit because of the man- 
hours saved by the employers. When employers 
by increasing efficiency produce a greater volume 
of utilities in relation to the effort applied, they 
are meeting the wants of a greater number of per- 
sons with less expenditure. They are liberating 
effort which, by means of the profit attained, may 
be applied in increasing production, to the end 
that there may be final utilities in greater volume 
and greater variety to meet the wants of a greater 
number of final purchasers. 

It is evident that the converse of the foregoing 
proportions is also true. If an individual pro- 



SUMMARY, RESTATEMENT 329 

ducer is paid more for the utilities he produces 
than that for which such utilities could be obtained 
from another; if an employee is paid more for 
his man-hours than that for which man-hours of 
the same quality could be procured from another ; 
if an employer is paid more for utilities than that 
for which utilities of the same kind and quality 
could be obtained from another, the cost of utili- 
ties, other things equal, has been unduly increased. 
Therefore all purchasers of such utilities are de- 
prived because of paying higher prices than are 
necessary to enlist the effort needful to the pro- 
duction of the volume requisite to meet their 
wants. When higher prices caused by undue cost 
of production apply to utilities of general and 
universal need the entire population is thus de- 
prived. 

The Value of a Utility Utilized in Production De- 
pends Upon the Return That Can Be Obtained 
hy Means of Its Utilization 

While the buyer of a utility does not take ac- 
count of the man-hours that have been applied at 
the various stages of its production, he is obliged, 
if the utility is one, such as a source of substance 
or an instrument of production, which he utilizes 
in further production, to take account of all the 
debits that are incurred in that further produc- 
tion. Profit, if it be secured, is expressed by the 
surplus of the total of the credits received over 



330 THE FLOW OF VALUE 

the total of the debits incurred in that produc- 
tion. This surplus is return upon the investment 
in the utility, and in that utilized in connection 
with it. The employer endeavors to obtain profit 
upon the total of the wages he has paid, therefore 
upon the wage paid each employee, and thus upon 
the man-hours applied by each employee. He en- 
deavors to obtain profit upon the total of expendi- 
ture for all else that he utilizes, and therefore 
upon each portion of that which he utilizes. 
Though he may not be able to allocate any propor- 
tion of profit to any particular utility in accord- 
ance with the degree to which its utilization has 
contributed to profit, he can allocate the profit in 
accordance with what he has paid for each utility. 
Suppose, for example, that an employer has util- 
ized a source of substance in the production of 
1000 units of a utility for sale ; that in the utiliza- 
tion he has paid as wages $100, for substance 
$100, for incidental expenses $20 ; and that he sells 
these 1000 units for 30 cents a unit or $300. His 
profit is $80. In strict significance this would be 
the gross profit, which would be diminished by 
that portion which must be applied toward main- 
taining the source of substance in as good condi- 
tion as before the utilization. The cost of produc- 
tion has been 22 cents a unit — 10 cents for wages, 
10 cents for substance and 2 cents for incidental 
expense. His profit would be 8 cents per unit, 
under the assumption that he made no allowance 



SUMMARY, RESTATEMENT 331 

for wage for himself. His profit per unit of prod- 
uct sold in accordance with these expenditures 
would be 3.64 cents on wages, 3.64 cents on sub- 
stance, and .72 cents on incidentals. If he had 
been obliged to pay $120 for substance, his profit 
would have been $60 instead of $80, 6 cents a 
unit instead of 8 cents. Allocated according to 
expenditures, this would be profit per unit of prod- 
uct of 2.5 cents on wages, 3 cents on substance, and 
.05 cents on incidentals. 

If the $100 received by the producer of sub- 
stance had yielded to him, for example, profit of 
$10, the higher price of $120 would, other things 
equal, yield to him profit of $30. If that sub- 
stance were Moo of his yield, and he sold the entire 
yield at the same price per unit, he would receive 
$12,000. If his cost of production were in the 
same proportion his profit would be $3000. 

If, under conditions that imposed no hampering 
restriction upon production, buying, and selling, 
there could be obtained through the utilization of 
that source of substance a yield which could be 
sold for $12,000, of which $3000 were profit, it 
would be that that substance was required at 
that price for transformation into final utilities 
which could be sold at a price that would enable 
the attainment of that profit by the producer of 
that substance. So long as that price could be 
obtained for such final utilities they would not be 
sold for a lower price. If the requisite supply of 



332 THE FLOW OF VALUE 

substance could be obtained from other producers 
at a lower price, he who bought such substance for 
transformation would so obtain it. Profit would 
accrue to him in higher measure, and, other things 
equal, in smaller measure to the producer of sub- 
stance. If competing producers produced such 
final utilities in increasing supply in relation to 
the demand, their prices would fall. Other things 
equal, those producers who could obtain substance 
at lower prices could sell the final utility at lower 
prices. If competing producers of substance pro- 
duced an increasing supply in relation to the de- 
mand, the price of substance would fall. The pro- 
ducer who had obtained $3000 as profit would be 
obliged to reduce his price and, other things equal, 
would obtain less profit. From sources of sub- 
stance of advantageous situation, or that could 
be utilized in producing substance of higher grades 
or in greater volume in relation to the effort ap- 
plied, profit would continue to be secured at lower 
prices for substance, although the total of that 
profit and the ratio of profit to debits incurred 
might diminish. 

Under our supposition that which could be ob- 
tained from the utilization of the source of sub- 
stance of our example was profit of $3000. If a 
person with accumulated credits desired to buy 
it, and would be content with a return of 10 per 
cent, upon his investment, he would be willing to 
pay $30,000 for that source of substance, includ- 



SUMMARY, RESTATEMENT 333 

ing, of course, its equipment. If the owner could 
not obtain more and sold it for $30,000, that would 
be its price. That would be its value, even if he 
did not sell it. The case is not quite so simple 
as this, because the profit of $3000 was obtained 
not only upon the source of substance but also 
upon the investment in wages and other expenses 
incurred in its utilization. For convenience and 
simplification, the effect of this element upon the 
value is here disregarded. 

If one who wanted to utilize that source of sub- 
stance was content with a net profit of $1500, he 
might be willing to pay rental in the amount of 
$1500, which would be one-half of the gross profit. 
If the owner was content with a net return of 
$1500 upon his investment, he might lease the 
source of substance for that rental, which would 
be return of 5 per cent, upon its value. If he 
paid for it $20,000 he would be receiving a return 
of 7V2 per cent, upon his investment; if he had 
paid for it $40,000 he would be receiving a return 
of 3% per cent, upon his investment. This would 
be return upon his investment but not upon the 
value. The value of the source of substance would 
not depend upon what he had paid for it, but 
upon what he could obtain for it, and this would 
be $30,000. That which he received for the right 
to its utilization would depend not upon what he 
had paid for it but upon what could be obtained 
by means of its utilization. And upon what could 



334 THE FLOW OF VALUE 

be obtained by means of its utilization would de- 
pend what could be obtained for it if it were sold. 
Therefore its value would depend upon what could 
be obtained by means of its utilization. If the 
price of substance fell, profit from the utilization 
might so diminish that $1500 could not be paid as 
rent; it might diminish so that rent could not be 
paid. If so, the value of the source of substance 
would fall. 

This makes clear the all-important fact that 
when it is said the source of substance yielded 
profit of $3000, it is meant that from its utiliza- 
tion profit was obtained in that amount. That 
utilization was by human effort. Without the ap- 
plication of human effort there would have been 
no yield of substance, no sale of substance, and no 
profit. The source of substance itself did not 
yield profit; it was its utilization that yielded 
profit. A factor in giving value to the source of 
substance was the essential characteristics 'that 
adapted it for utilization toward meeting human 
wants, but value could not be realized unless it 
was sold, or unless it was utilized toward meeting 
wants. Its essential characteristics would not 
give it value unless it were utilized or of potential 
utilization. 

Living Upon Rent, Interest, or Profit 

If the source of substance were rented for 
$1500, the owner might, if he so elected, maintain 



SUMMARY, RESTATEMENT 335 

himself and his family upon this income without 
applying his own effort in production. This 
would mean that the owner, without applying his 
effort in production, would have command over 
man-hours sufficient to provide final utilities for 
the man-days of himself and family. 

The profit of $3000 secured by means of the 
utilization of the source of substance was ob- 
tained by the application of man-hours. That 
profit gave command over man-hours. Whether 
of that profit $1500 were paid to the owner as 
rent it still would be that that rental was derived 
from the application of man-hours and that it gave 
command over man-hours. It is so also with rent 
derived from according the right to utilize an in- 
strument of production. It is so also: with inter- 
est derived from according the right to utilize 
accumulated credits. It is so also with profit of 
every kind obtained in that production, buying, 
and selling upon which the continuity of produc- 
tion depends, even though a portion of that profit 
accrue to one who does not apply his effort in 
production. 

Source of substance or instrument of produc- 
tion would not return profit nor rent nor inter- 
est to him who receives them unless utilized to- 
ward the production of utilities which meet hu- 
man wants, and for which buyers pay the prices 
that enable the attainment of profit, rent, or in- 
terest. Those whose purchases of utilities have 



336 THE FLOW OF VALUE 

enabled such attainment have obtained that for 
which they have paid. In the absence of hamper- 
ing restrictions upon production, buying, and sell- 
ing, they have the opportunity to buy the utilities 
they want at the lowest prices at which they can 
be bought, and therefore the attainment of rent, 
interest, or profit under such conditions does not 
deprive them. 

It is quite true, however, that any person ca- 
pable of applying effort toward the benefit of 
others, who lives upon profit, rent, or interest 
without so applying his effort, is depriving his 
fellow men of the results of available effort. He 
is also depriving himself of that exercise of his 
faculties which conduces to the fullness of his own 
life. The human body and brain are what they 
are because of the activity compelled by the strug- 
gle for existence throughout the untold ages dur- 
ing which the interaction between man and his 
environment developed the body and brain into 
what they are. The dictum of certain economists 
that man obtains that which he wants by sacrifice, 
that work is pain to be endured for the sake of 
the resulting pleasure, that effort applied is a dis- 
utility to be offset by the utilities gained, is due 
to a misconception of man ^s place in nature which 
has permeated the thought of the nations to the 
injury of mankind. If a man does not use his 
bodily organs in overcoming that which offers 
resistance, they deteriorate; and if he does not 



SUMMARY, RESTATEMENT 337 

use his brain in arriving at decisions continually 
compelled by his relations with his environment, 
it degenerates. 

But those who, with credits obtained as profit, 
rent, or interest that afford a surplus over their 
expenditures for final utilities, invest that surplus 
in channels of production, buying, and selling, may 
by discriminating investment render service to 
their fellow men not less important than those who 
immediately apply their effort in these channels. 
By placing credits in the way of that utilization 
from which the greatest profit may be derived 
they contribute to the production of utilities for 
which there is the greatest demand in relation to 
supply. By transferring credits over which they 
have command from one line of production to 
another, as there are changes in the interrelations 
between supply and demand, they tend toward the 
adjustment of production in that relativity which 
serves in the utmost degree toward meeting the 
varied wants of all persons. To such discrimi- 
nating investment is requisite wide information 
and sound judgment, the application of man-hours 
of a high, if not of the highest, order. 

It remains the fact, however, that those who 
expend credits derived as profit, interest or rent 
from production, buying and selling in which their 
effort has absolutely had no part, do not expend 
of their man-hours in return for command over the 
man-hours of others. Their expenditure is of the 



338 THE FLOW OF VALUE 

command over the man-hours of others which they 
have received without the application of effort. 
As all production is through the application of 
available man-hours, their expenditure is not with- 
out effect in determining the proportions in which 
these man-hours are applied in the respective 
kinds of production. Therefore it is necessary 
that there be further analysis of the effect of the 
expenditures of all persons upon production. 

Man-hours for Man-hours 

To the final sellers of final utilities — those who, 
as a rule, are retail dealers — are paid credits ex- 
pressed in terms of dollars and certified by coins, 
bank notes, government notes, or checks on banks. 
These dollars may have been received as wages 
for effort applied under the direction of an em- 
ployer; or by an employer from the sale of utili- 
ties for the production of which he has been re- 
sponsible; or as fees for professional effort ap- 
plied in rendering services to each of a number 
of clients ; or they may have been received as rent, 
as interest, as profit; or from the sale of source 
of substance. 

Credits received by wage-workers in the pro- 
duction of utilities, for the sale of which their 
employers are responsible, are in return for man- 
hours applied by the recipients of such credits. 

Credits received by domestic and personal serv- 



SUMMARY, RESTATEMENT 339 

ants are in return for man-hours applied by the 
recipients of such credits. 

Credits received as fees by those who practise 
the professions — which merge into salary when 
such effort is applied continuously in the service 
of the same client, as that of a teacher, or of a 
doctor, or of a lawyer under salary — are in re- 
turn for man-hours applied by the recipients of 
such credits. 

Credits received by those who practise the arts, 
such as accrue to artist, sculptor, composer, or 
author, are in return for the man-hours applied 
by them in the production of paintings, statues, 
musical compositions, or books. 

Credits received by employers from the sale of 
utilities are in return for the results of man-hours 
applied by themselves and by their employees, and 
for the results of man-hours applied in the past 
utilized by them in production. Tliese credits are 
due in part to the man-hours of employees applied 
in the present, in part to the results of man-hours 
applied in the past that are utilized, and in part 
to the man-hours of the employer. 

Credits received as profit — or as rent, or inter- 
est, which intrinsically are profit to the recipient 
— are from the sale of the results of man-hours 
applied in the past. Profit is the surplus of the 
return received by the employer over what he pays 
for the man-hours of others applied in the present, 



340 THE FLOW OF VALUE 

and for the results of the man-hours of others ap- 
plied in the past, and therefore is return for the 
application of the man-hours of the employer. 

The employer who sells utilities of any kind, 
for the production of which he has been respon- 
sible, must from the credits received pay wages 
to immediate employees, which are expended by 
them in greater or less proportions for final util- 
ities. He must make payments to the employers 
responsible for their production for the results 
of man-hours applied in the past which he has 
utilized. These in turn must pay wages to their 
employees, and make payment to employers re- 
sponsible for its production for that which they 
have utilized. This course continues throughout 
all production. While the employer is responsi- 
ble for the return accruing to many, perhaps a 
multitude of persons, for the man-hours applied 
by them, and perhaps to many others for the 
return upon that in which they have property, the 
return accruing to him in which he has property is 
in the form of net profit. If he is to increase the 
productivity of his business, part of this profit 
must be expended for the utilities which enable 
that increase, and thus be paid to those whose 
man-hours produce those utilities. If he enlists 
more employees, portions of the profit must be 
paid as wages. If he increase his purchases of 
the results of past effort, increased portions of 
the profit must be paid to the employers producing 



SUMMARY, RESTATEMENT 341 

them. If any portion of the profit be invested in 
other production, it will be likewise expended by 
those responsible for that production. Thus the 
individual return for his individual use received 
by the employer is no more than that portion of 
his credits which he expends for final utilities for 
the use of himself and those dependent upon him. 

If investment in production involve purchase 
of instrument of production or source of sub- 
stance, the buyer pays immediately utilizable com- 
mand over man-hours in the expectation of obtain- 
ing greater command over man-hours by means of 
its utilization. There must be paid wages that 
give command over man-hours applied in that util- 
ization, and there must be paid credits for the 
results of man-hours applied in the past required 
in that utilization. The seller obtains credits with 
which he may buy final utilities and thus exert 
command over man-hours, or he may invest a por- 
tion of the credits in further production, in which 
case they will pass to those who apply their man- 
hours. 

Rent, interest, or profit may accrue in various 
proportions to those who at the same time receive 
credits in return for the direct application of 
their man-hours, if they have made investment 
of accumulated credits ; and to employers, in addi- 
tion to the profit received by them in the produc- 
tion for which they have been responsible, if they 
have made other investment. To the extent that 



342 THE FLOW OF VALUE 

credits so derived are expended by the recipient 
for iinal utilities they enhance his command over 
man-hours which minister to his individual wants. 
To the extent that they are reinvested they must 
pass to those who buy final utilities. Those who 
further production by investing in means of pro- 
duction provide the credits which in greater pro- 
portion pass as wages to those who apply their 
efforts in production. 

Thus we perceive that in overwhi^lmingly greater 
proportion the final purchases of final utilities are 
effected by credits received in return for the man- 
hours applied by those who so expend them. The 
only credits expended for final utilities that are 
otherwise derived are of those obtained as rent, 
interest, or profit which are not reinvested in pro- 
duction, and they have been received for man- 
hours applied by others. Thus it is that coins, 
bank notes, government notes, and checks on banks 
paid to retail dealers for final utilities are cred- 
its received in return for the application of man- 
hours. They pay for utilities in which man-hours 
are embodied, and thus man-hours pay for man- 
hours. If credits have been received as wages, 
they are in return for man-hours applied by those 
who have received the credits. If they have been 
received as rent, interest, or profit, they are com- 
mand over man-hours that have been saved by 
employers in the sense that they have produced 
utilities with the application of a smaller number 



SUMMARY, RESTATEMENT 343 

of man-hours than have been paid for them, and 
thus have obtained command over a greater num- 
ber of man-hours than those for which they have 
paid in production. 

While in the continuity of production, buying, 
and selling final utilities, as a rule, reach the final 
purchaser through the retail dealer, utilities of 
any kind of more than transient usefulness may 
be bought and sold by those who have acquired 
property in them subsequent to their sale by reg- 
ular dealers. There is, for example, the buying 
and selling of second-hand clothing to a degree 
not generally known. There is the sale of furni- 
ture, household utensils, tools, farm implements, 
domestic animals, vehicles of one kind and an- 
other, and machines of various kinds by those who 
have used them. Such a sale may be consum- 
mated by the transfer of credits from the buyer 
to the seller, or there may be the *^ trading'^ of 
a utility of one kind for a utility of another kind, 
each party desiring the thing he obtains more 
than the thing with which he parts. There fre- 
quently is the sale of an instrument of production 
by other than the original purchaser to one who 
may believe that he can utilize it toward obtaining 
credits in greater measure than he who parts with 
it. In any event there is the sale of the results 
of the application of the results of effort, and the 
buying of the results of the application of effort; 
man-hours are balanced against man-hours. 



344 THE FLOW OF VALUE 

Employers by utilizing credits, and investors 
by placing credits in the way of that utilization 
through which profit, rent, and interest are ob- 
tained, contribute to the production of final util- 
ities which meet wants to the extent that they are 
purchased by final buyers. As it is the impulse 
given by final buyers which determines the pro- 
portions in which final utilities shall be produced, 
this .impulse tends to determine the proportions 
in which man-hours are applied in the various 
stages and phases of the respective kinds of pro- 
duction, and therefore the proportions in which 
credits are invested in all that is requisite at the 
various stages and phases of the different kinds 
of production. Thus it is in accordance with the 
demand of final buyers for final utilities that em- 
ployers enlist effort not only in the production 
of substance, intermediate utilities, and final utili- 
ties but also in the provision of instruments of 
production, and in accordance with which they 
utilize sources of substance. 

While the continuity of production, buying, and 
selling in the ultimate analysis is the exchange of 
man-hours for man-hours, and, in the main, the 
exchange of man-hours applied in the past for 
man-hours applied in the present, this exchange 
is effected through intervening phenomena. The 
employee sells man-hours to the employer but 
does not receive man-hours directly in return. 
He receives wages in the form of credits that give 



SUMMARY, RESTATEMENT 345 

command over the results of the application of 
man-hours, which in essence is command over the 
man-hours applied. The employer buys man- 
hours but in return he does not pay man-hours di- 
rectly; he pays wages. In the purchase of the 
utilities which he utilizes, the employer pays for 
man-hours applied in the past in the sense that 
he pays for the results of man-hours applied in 
the past. And so also, in this sense, the buyer 
of substance pays for the man-hours applied in 
its production, the buyer of intermediate utili- 
ties pays for the man-hours applied in their pro- 
duction, the buyer of instruments of production 
pays for the man-hours applied in their produc- 
tion, the buyers of final utilities pay for all of 
the man-hours applied in their production. 

The True Significance of the Ratio of Exchange 

The continuity of the application of man-hours 
and of the exchange of the results of their appli- 
cation for the man-hours that are further applied, 
means that there must be the continuity of debits 
and credits. 

Credits received by an employer indicate that 
utilities, for the production of which he has been 
responsible, have been sold. 

Credits received by an employee indicate that 
his man-hours have been sold; that is, that they 
have been applied under the direction of the em- 
ployer. 



346 THE FLOW OF VALUE 

Debits incurred by an employer indicate that 
he has paid for man-hours applied. This state- 
ment summarizes the incurring of all debits by 
all employers in the various stages and phases 
that lead to the production of final utilities, be- 
cause as in the receding stages of production cred- 
its pass from one employer to another, each em- 
ployer incurs debits for the man-hours he has 
enlisted, and for the results of the man-hours he 
has utilized. 

Debits incurred by an employee indicate that 
his credits have been expended for final utilities, 
or that the command over man-hours accorded by 
them has otherwise been exerted. 

The supreme importance of the fact that the 
employer buys man-hours and sells final utilities 
— or what in the course of production eventuate 
in final utilities — and that the employee sells man- 
hours and buys final utilities, makes its emphasis 
desirable. If there were but one stage in the 
production of final utilities, and the processes 
were conducted by one organization of employer 
and employees, employers would incur debits for 
wages and employees would incur debits for final 
utilities. In the prolongation of production all 
of the employers in the several stages incur debits 
for wages, and the total of wages paid by all em- 
ployers in the several stages to all of the em- 
ployees are for effort applied toward the produc- 
tion of final utilities. If the production were at 



SUMMARY, RESTATEMENT 347 

one stage, the credits of one employer would be 
resolved into wages and profit. When the pro- 
duction is through several stages, the credits that 
pass from one employer to another are resolved 
into the wages paid by and the profit received by 
the several employers. In essence the effect is 
the same as though the production were by one 
employer and his employees, in the sense that an 
employer receives credits for utilities sold and 
buys man-hours, while the employee receives 
credits for man-hours applied and buys final utili- 
ties. Thus the exchange of man-hours for man- 
hours is effected, in essence, through the exchange 
by the employer of final utilities for man-hours, 
and the exchange by the employee of man-hours 
for final utilities. 

Therefore the price of final utilities as expressed 
in dollars — that is, the ratio of final utilities to the 
dollar — is not the ratio at which final utilities ex- 
change for other final utilities. It is the ratio at 
which final utilities exchange for man-hours ; that 
is, the ratio at which want-units exchange for 
man-hours, and man-hours for want-units. Ee- 
tail dealers do not — save in exceptional cases 
which may be shown in essence not to be exceptions 
— exchange flour, mutton, potatoes, butter, eggs, 
collars, stockings, shoes, hats, nails, knives, forks, 
calico, watches, finger-rings, washtubs, dishpans, 
newspapers, books, and so forth and so on, utili- 
ties of one kind for utilities of another kind. They 



348 THE FLOW OF VALUE 

buy final utilities from the final producer, and 
sell them to the final purchaser. Final utilities 
are sold at prices expressed in dollars. They 
have a ratio to the dollar, but that is not their 
exchange ratio in the sense that utilities of one 
kind exchange for utilities of another kind. It 
has been, however, through a long evolution that 
the ratio to the dollar of utilities produced, and 
the ratio to the dollar of man-hours applied, have 
come to be determined by the interrelations be- 
tween the proportions in which man-hours are 
applied in the production of utilities, and the pro- 
portions in which man-hours buy utilities pro- 
duced. 

The first exchanges, when a community emerges 
from self-sufficiency, are of things of one kind for 
things of another kind. But even then, although 
the exchange ratios indicate the measure of things 
of one kind that exchanges for a measure of things 
of another kind, it is really the effort applied in 
producing things of one kind that is paid for when 
things of another kind are obtained in exchange 
for them. When the medieval artisan took wares 
of the kinds he produced to a fair and exchanged 
them for things of the different kinds he wanted, 
the exchange ratios indicated the measure of 
things of one kind that were exchanged for a meas- 
ure of things of another kind, but it was also the 
effort applied in producing things of one kind that 
was paid for when things of another kind were ob- 



SUMMARY, RESTATEMENT 349 

tained in exchange for them. When there was 
first an organization of employer and employee, 
the employer received credits for the utilities sold 
and paid wages to his employee. The credits paid 
the employee as wages enabled him to buy things 
of various kinds, but it was his man-hours applied 
in production that paid for these various things. 
His man-hours gave command over the results 
of the man-hours of others, and therefore over the 
man-hours of others. With the evolution of the 
merchant, who bought a variety of final utilities 
from their final producers and sold them to a num- 
ber of final purchasers, from whom he did not 
obtain other final utilities in exchange for them, 
it becomes more evident that the ratio of final 
utilities to the dollar was not really determined 
by the exchange of final utilities for final utilities. 
In the present stage of commercial and industrial 
evolution, in which all final utilities are produced 
by man-hours applied in successive series to sub- 
stance, intermediate utilities, and through instru- 
ments of production in the production of final 
utilities, it becomes all the more clear that the 
ratio of exchange is the ratio at which man-hours 
exchange for want-units and want-units for man- 
hours. 

If in the production of all final utilities there 
were but one organization of employer and em- 
ployee, final utilities as they were produced would 
be the property of the employer until they had 



350 THE FLOW OF VALUE 

passed to the employee. When they had so 
passed, the man-hours for which they had paid 
would have produced other utilities, which would 
be the property of the employer until they passed 
as wages to the employee, and so on in the con- 
tinuity of production. 

It is likewise when the production of final utili- 
ties of all kinds is by various organizations of 
employer and employees engaged in the various 
stages and phases of the production. Credits re- 
ceived by employees as wages are in return for 
man-hours applied in the present which will 
eventuate in final utilities in the future. With 
these credits they buy final utilities that have been 
produced prior to the application of the man- 
hours for which the wages were received. The 
man-hours for which these credits have been re- 
ceived eventuate in the production of final utili- 
ties in the future, which the employees may buy 
when they have received wages for the applica- 
tion of man-hours that will eventuate in the pro- 
duction of final utilities in the further future. 
Man-hours are ever being paid for final utilities 
that have been produced; final utilities that have 
been produced are ever being paid for man-hours 
that will result in the production of final utilities 
in the future. As it is in terms of the dollar that 
man-hours are bought, and it is want-units that 
pay for man-hours; and as it is in terms of the 
dollar that want-units are bought, and man-hours 



SUMMARY, RESTATEMENT 351 

pay for want-units, it follows that the true signifi- 
cance of the dollar is the relation of man-hours 
to want-units, of want-units to man-hours. 

The ratio to the dollar of man-hours — that is, 
the wage of the employee — is determined by inter- 
relations between the supply of and the demand 
for effort of the quality he is capable of applying 
toward the production of final utilities; and the 
ratio to the dollar of final utilities is determined 
by the interrelations between the supply of and 
the demand for final utilities of the respective 
kinds which find expression in the proportions of 
man-hours applied that final purchasers pay for 
final utilities of the respective kinds. Therefore, 
the ratio to the dollar of substance, intermediate 
utilities, and instruments of production is deter- 
mined by interrelations between the supply of and 
the demand for such utilities in the processes that 
lead to the production of final utilities. The ratio 
to the dollar of sources of substance is determined 
by interrelations between the supply of and the 
demand for the substance yielded, and thus de- 
pends upon the interrelations between the supply 
of and the demand for the final utilities into which 
that substance is ultimately transformed. 

The ratio to the dollar of man-hours is deter- 
mined at the time the man-hours are applied; the 
ratio to the dollar of final utilities is determined, 
as a rule, after they have been produced and 
wages have been paid for man-hours applied in 



35a THE FLOW OF VALUE 

their production. It is the employers who are 
responsible for the payment of wages at the time 
man-hours are applied, and for the sale of the 
utilities after they have been produced. They are 
responsible for the adjustment between man- 
hours applied in the past, in the present, and in 
the future. 

The Synthesis of Production 

Every person must have final utilities in a 
certain variety and in certain proportions. The 
total of credits received from the sale of final 
utilities of any kind must enable all of the em- 
ployers and employees engaged in their produc- 
tion to buy final utilities of other kinds in various 
proportions. The total of credits received by all 
final sellers from the sale of all final utilities must 
enable each employer and each employee engaged 
in their production to buy final utilities of various 
kinds and in various proportions. 

If, for example, 141 want-units of utilities Nos. 
1, 2, 3, 4, and 5 are required for the man-day of 
one person, the employers responsible for the pro- 
duction of all of these utilities must produce them 
in volumes that will enable each person applying 
his efforts to obtain at least 141 units of the differ- 
ent utilities in the requisite proportions. That is, 
the number of want-units of all kinds in the requi- 
site proportions must be at least 141 times the 
number of persons engaged in the production. 



SUMMARY, RESTATEMENT 353 

If at a given time there is a smaller than the 
requisite relative production of a utility of any 
kind, and each person expends the same proportion 
of his man-hours for want-units of that kind, he 
will ohtain a smaller measure of them in return. 
If, in order to obtain the same measure of that 
utility as before, a number of persons respectively 
expend the increased proportions of their respec- 
tive man-hours necessary to its attainment they 
will not, other things equal, be able to buy the 
same measures of other utilities, and the remain- 
ing number of persons will be unable to buy that 
utility. There would be a diminution in the total 
number of want-units received by all persons in 
return for their man-hours. If there be a dimin- 
ished production of two or more of the utilities, 
there will be a further reduction in the number of 
want-units received in return for the man-hours 
applied in production. 

If, on the other hand, a larger than the relative 
volume be produced of a utility of any of these 
kinds, the employer will have a surplus of utilities 
of that kind. But he will have no advantage in 
producing a larger volurae if he is obliged to sell 
it for the same total of credits as the smaller vol- 
ume previously produced. If he can obtain from 
the sale of a larger volume command over a 
greater number of man-hours, he may be encour- 
aged to increase his production. He can not, how- 
ever, obtain this greater command unless the rela- 



354< • THE FLOW OF VALUE 

tive volume of the other utilities has so increased 
that an additional supply of each will contribute 
to command over an additional number of man- 
hours. That is, if no more of the four other util- 
ities are produced than sufficient to supply the 
same proportions as before of the wants of each 
person then engaged in production, the efforts of 
additional persons can not be enlisted because of 
the larger production of one utility alone. If the 
production of all &ve of the utilities has increased 
in relation to the effort applied, the efforts of addi- 
tional persons can be enlisted in production. As 
many additional persons can be employed as can 
be supplied with 141 units of the five utilities, 
and as will apply their man-hours in return for 
that wage. 

So long as employees could be obtained by the 
payment to each of 141 units of the five utilities, 
and the production of each utility were at the same 
increased ratio in relation to the effort applied, 
profit from the production of these utilities would 
increase in the ratio that the volume of those pro- 
duced exceeded 141 units for each employee, pro- 
vided there were additional persons over whose 
man-hours the surplus would give command. If, 
however, production increased in greater ratio 
than the number of employees available, there 
would be competition between employers for em- 
ployees. To the extent that he could obtain profit 



SUMMARY, RESTATEMENT 355 

by paying increased wages, profit which conld not 
be obtained unless he paid increased wages, an 
employer engaged in the production of a utility 
of one kind might endeavor to secure employees 
by paying higher wages. Employers engaged in 
the production of the other utilities would be 
obliged to increase the wages of their employees, 
and thus it would come about that each employee 
would receive more than 141 want-units as his 
wage. But no one of the employers responsible 
for the production of any one of the five utilities 
would be encouraged to increase its production 
unless from its sale he could obtain greater com- 
mand over man-hours than were applied in the 
production. Thus the continuing attainment of 
profit by employers responsible for the production 
of any one of these utilities would be dependent 
upon the continuing attainment of profit by em- 
ployers responsible for the production of all of 
these utilities. 

This example leads to the deduction that 
throughout industry and commerce wages are de- 
termined not alone by the number of employees 
seeking employruent and the demand of employ- 
ers for employees, but also upon the relativity of 
the production of the want-units which the em- 
ployee must buy with his wages ; and that profit 
is determined not alone by the volume in which 
a utility is produced in relation to the effort ap- 



356 THE FLOW OF VALUE 

plied, but also by the relativity of the production 
of the want-units that are requisite to enlist man- 
hours in production. 

If a final buyer have the choice of expending a 
proportion of his credits for a utility of one kind 
or a utility of another kind, he would contribute a 
portion of the man-hours over which he has com- 
mand towards the production of the utility which 
he buys. If, however, the utility be of a kind that 
is essential to the maintenance of his man-days 
he must have that utility, no matter what pro- 
portion of his man-hours he pays for it. The 
substances of which final utilities are constituted 
are not of such great variety that there is not a 
continuous demand for substances of each kind, 
especially of the staple substances that most ef- 
ficiently serve the purpose when they are trans- 
formed into the final utilities for which there is 
continuing demand. Organizations of employer 
and employee are continually engaged in the va- 
rious stages and phases of the transformation of 
such substances into final utilities. They have 
acquired property in, or the right to the utiliza- 
tion of, that which is necessary to the production, 
and endeavor to continue in such production. 
There are organizations, new and old, and of vari- 
ous degrees of prosperity, from those on the mar- 
gin of existence to those with large accumulations 
of assets and property. As a rule, therefore, the 
final buyers buy final utilities of all kinds that 



SUMMARY, RESTATEMENT 357 

have been produced and are available in the 
market. This statement needs little qualification 
because of the final utilities that are made to or- 
der, because, as a rule, staple substances are 
transformed into them, and they are not widely 
dissimilar from other utilities of the same kinds. 
Final buyers endeavor to increase their command 
over final utilities, and the producers of final utili- 
ties endeavor to increase their sales. To this end 
they transform substances into final utilities of 
the grades and designs that they believe will at- 
tract purchasers, and resort to alluring devices in 
presenting these utilities for sale. The final pur- 
chaser buys utilities of the kinds that meet his 
wants, and the final producer endeavors to pro- 
duce utilities of the kinds that will tempt the 
expression of his wants into their purchase; that 
is, into the payment of the man-hours over which 
ihe has command in return for the man-hours ap- 
plied in their production. 

The continuing production of any final utility is 
in a continuing circuit, which begins with the 
application of man-hours to a source of substance 
and ends when the utility passes to the final buyer; 
this circuit is through a period of time. It, there- 
fore, is not without analogy — that, imperfect as it 
is, will serve as illustration — to the circuit of a 
wheel that moves forward as it revolves. In this 
circuit one point of the circumference is ever suc- 
ceeded by another point. So also in a circuit of 



358 THE FLOW OF VALUE 

production, substance succeeds substance, inter- 
mediate utilities succeed intermediate utilities, 
final utilities succeed final utilities, and man-hours 
succeed man-hours in their application. The cir- 
cuit of production of one final utility is concurrent 
with the circuits of production of all other final 
utilities. As man-hours are applied in difiFerent 
proportions in the production of final utilities of 
different kinds, and as different periods of time 
are required in the production of final utilities of 
different kinds, the circuits of production of final 
utilities are of different circumferences and their 
respective revolutions are through different pe- 
riods. 

Within a circuit of production the utilities that 
emerge as credits from one stage pass as debits 
to the succeeding stage. When they have finally 
emerged as credits in the form of want-units, they 
pass as debits into a circuit of production, minis- 
tering to the man-days from which emanate man- 
hours applied in further production that gives rise 
to further credits. Credits from one circuit of 
production are ever being absorbed as debits by 
another, wherein they are transmuted into credits 
which in turn are absorbed by another circuit as 
debits. Any one circuit of production becomes 
weaker if the ratio of debits to credits increases, or 
becomes stronger if the ratio of credits to debits 
increases ; but in the aggregate the strength of all 
the circuits must increase, and there must be a 



SUMMARY, RESTATEMENT 359 

relativity in the increasing strength of the differ- 
ent circuits of continuing production. 

Waiting for Payment 

Payment in ordinary significance is made when 
a credit is received for a debit; that is, when for 
utilities sold immediately utilizable command over 
utilities is received. Therefore as an employee 
receives a credit when he has received the com- 
mand over utilities that constitute his wage, he has 
in this sense received pay for the man-hours he 
has applied. In a further sense he does not re- 
ceive payment until he has obtained the want- 
units over which his wages give command, and 
thus has exerted the command over man-hours 
obtained in return for applying his man-hours. 

The employer does not receive credits offsetting 
the debits incurred in production until he has sold 
the utilities produced. If they are saleable, the 
utilities are assets even though they are not imme- 
diately utilizable as command over utilities. If 
he has sufficient accumulation of credits obtained 
from the sale of utilities in the past, an employer, 
as a rule, pays wages in advance of the sale of the 
utilities produced. If he have not such an accu- 
mulation of credits, employees may have to await 
the sale of the utilities before they receive their 
wages, but this seldom happens ; it has become the 
almost invariable custom that wages be paid when 
man-hours have been applied. It may be that 



360 THE FLOW OF VALUE 

when an employer has paid wages for the produc- 
tion of a volume of utilities he will not have the 
credits wherewith to pay wages for the further 
production until these utilities have been sold. In 
such a case he may borrow credits, the utilities at 
times serving as security for the loan until they 
have been sold for the credits with which it is paid. 
If he is thus obliged to borrow credits, they can 
only be obtained from those who have accumulated 
them. Thus wages are paid from accumulated 
credits, whether the employer have property in 
them or whether he borrow them from another 
who has property in them. When an employer 
has accumulated credits, utilities produced by him 
in the past have paid for the effort applied in the 
past and have yielded a surplus of credit that 
gives him command over effort to be further ap- 
plied. If an employer has to await the sale of 
utilities produced before he can pay for the effort 
applied in their production, the credits obtained 
when the utilities are sold will not give him com- 
mand over effort to be applied in future produc- 
tion unless they yield a surplus as profit. If he 
can continuously increase his production in rela- 
tion to the effort applied, he may obtain profit that 
may so accumulate as to obviate the necessity for 
borrowing. 

Before he obtains the credits that reimburse 
him for debits expended, he who makes investment 
in source of substance must await the production 



SUMMARY, RESTATEMENT 361 

and sale of substance; he who makes investment 
in substance for transformation into intermediate 
utilities must await that transformation and 
sale; he who makes investment in intermediate 
utilities for transformation into final utilities 
must await that transformation and sale ; he who 
invests in final utilities for subsequent sale is 
obliged to await that sale. 

When investment has been made in instruments 
of production, the necessity for awaiting return is 
apparent. As through specialization and coordi- 
nation the production of utilities increases in 
greater ratio than the number of those engaged 
in production, it becomes possible for an increased 
volume of want-units to buy man-hours not imme- 
diately applied toward the production of final util- 
ities. Thus, those with accumulated credits can 
employ effort in the production of instruments of 
production. 

While an instrument is being operated, wages 
must be paid to those applying their efforts in 
its operation, and there must be want-units for 
which those wages can be expended. An instru- 
ment of production is utilized throughout a period 
of time. Day by day as it is operated utilities flow 
from its utilization. The employer responsible 
for their production does not receive return of the 
credits invested in the instrument until the credits 
obtained from the sale of the products are suffi- 
cient not only to pay the expense of operation but 



362 THE FLOW OF VALUE 

to yield a surplus equivalent to the investment. 
This is usually not until it has been operated 
through a period of years. Through the investor 
and by means of the employer, man-hours applied 
in the past are balanced against man-hours ap- 
plied in the future. But if the investor receives 
no more than the repayment of his investment, he 
has not received return upon the investment ; that 
is, he has not received profit upon the investment. 
If an investor did not expect to receive more than 
the return of his investment, he would not make 
the investment. 

An instrument of production may be paid for at 
the time of purchase from accumulated credits in 
which the buyer has property, or it may be bought 
under promise of payment in the future, or paid 
for in part from accumulated credits and in part 
by promise of future payment. If the buyer of 
the instrument has made immediate payment, he 
will have property in the credits obtained through 
its utilization. If he promise future payment, he 
assumes the responsibility of obtaining credits 
that will yield a surplus over the debits incurred 
for wages and for utilities transformed. It is so 
also with the sale and purchase of sources of sub- 
stance — farms, forests, and beds of minerals. 
"When there is immediate payment for a source of 
substance, accumulated credits pass from the 
buyer to the seller. When there is a promise of 
deferred payment, credits obtained from the sale 



SUMMARY, RESTATEMENT 363 

of utilities produced must be sufficient to pay for 
the effort applied in their production and to yield 
a surplus wherewith the deferred payment can be 
made. In case of immediate payment profit ob- 
tained from the utilization will be return upon the 
investment. In case of deferred payment the in- 
vestment will not be consummated until the pay- 
ment is made. Payment for instrument of pro- 
duction or source of substance will be made either 
from profit secured in the past or from profit se- 
cured in the future. 

He who sells utilities for which immediate pay- 
ment is not received may await return without 
other certificate of indebtedness than the open 
account on his books. Although there rarely is 
investment in such accounts by another, it some- 
times happens that open accounts are sold by one 
who under stress is in need of immediately utiliz- 
able credits, and there are those who buy doubtful 
accounts at a heavy discount with the intent of 
exerting pressure for their payment and thus ob- 
taining profit. When certificates of indebtedness 
in the form of promissory notes are discounted by 
banks or by individuals, investment is made in 
them. When instruments of production or 
sources of substance are sold on deferred pay- 
ment, the buyer, in addition to the certificate of 
indebtedness, usually gives a mortgage pledging 
the return of the property bought in case payment 
is not made. Such mortgages may be bought by 



364 THE FLOW OF VALUE 

investors, who thus secure the right to the de- 
ferred payment and to the interest. Investment 
in a partnership may be certified by articles of 
agreement, and these may be transferred to an 
investor who may desire to become either an active 
or an inactive partner. Investment in a corpora- 
tion is thus certified by bonds or by shares of stock. 
While there may not be investment in a partner- 
ship except by consent of the partners, there may 
be investment in a corporation by any one who can 
pay for its stocks. They are bought and sold 
in volumes both small and large, sometimes in 
volumes so large that the control of a corporation 
passes from one group of investors to that of an- 
other. In any event he who invests in a partner- 
ship or a corporation is obliged to await return 
upon his investment until utilities have been pro- 
duced and sold. 

The Retention of Credits 

Dollars of credit mean that utilities have been 
sold for which the seller is entitled to receive other 
utilities. The retention of credits means that the 
owner does not need to exercise, or does not desire 
to exercise, his command over man-hours, or over 
the results of man-hours, during the period for 
which he retains them. After the period of re- 
tention the command over utilities accorded by 
such credits may be greater or less than it would 
have been had they been expended at the time of 



SUMMARY, RESTATEMENT 365 

acquisition. This command over utilities might 
be greater or less than if the credits had been util- 
ized in production during the period throughout 
which they were retained. When retained cred- 
its are in the form of bank entries, they may be 
utilized by the bank in further production. In 
any event, after the period of retention, the com- 
mand over utilities, either in the form of man- 
hours or of want-units, would depend upon their 
ratio to the dollar at that time. 

Wage-earners may retain portions of their 
credits until they are needed. As he sells his 
stock from time to time, credits flow to the re- 
tail dealer in excess of those he needs immedi- 
ately to expend. He may not replenish his stock 
until after a period, especially if it meet the 
wants of a particular season. And so also with 
the wholesale dealer. The producer of iinal utili- 
ties may replenish his stock of intermediate utili- 
ties, and the producer of intermediate utilities 
may replenish his stock of substance only at cer- 
tain intervals during which their credits accumu- 
late. Portions of the credits received by those 
engaged in seasonal production may remain in 
their possession until expenditure is made in 
preparation for the production of an ensuing sea- 
son. Profit of a partnership or a corporation is 
composed of credits that accumulate until they are 
distributed to the investors as dividends or in- 
vested as surplus. Thus when production, buy- 



366 THE FLOW OF VALUE 

ing, and selling are by a vast population, there are 
from time to time vast accumulations of credits 
which in a country of developed banking methods 
are in greater part in the form of credit entries 
on the books of banks. 

While all of the credits on the books of banks 
may be utilized in the buying of utilities of any 
kind, it is to be remembered that in the produc- 
tion of final utilities in the proportions in which 
they meet wants, efforts must be applied in vari- 
ous proportions ; that is, there must be a relativity 
of effort. If this relativity is to be promoted, the 
credits on the books of banks must be expended 
in ways that further that promotion. If all of 
these credits were expended by their owners for 
final utilities for their immediate personal use or 
gratification, there could be no further production 
beyond the extent to which these final utilities then 
in existence would maintain that vitality from 
which productive effort emanates. If the accumu- 
lation of credits were expended for instruments 
of production, a disproportionate proportion of 
the available effort would be applied in the provi- 
sion of instruments of production. They would 
so increase in number and capacity that there 
could not be the provision of substance sufficient 
to occupy them in transformation, nor sale for the 
utilities into which it were transformed. If all of 
these credits were expended for intermediate utili- 
ties, there would be a disproportionate applica- 



SUMMARY, RESTATEMENT 367 

tion of effort in the transformation of substance 
into intermediate utilities, with the result that 
there would be intermediate utilities exceeding the 
demand for transformation into final utilities, and 
there would also be an inordinate demand for sub- 
stance to be transformed into intermediate utili- 
ties. If all of those credits were expended for 
substance, a disproportionate proportion of effort 
would be enlisted in the production of substance, 
and there would be less of effort available for its 
transformation. If all of these credits were in- 
vested in sources of substance, there would not be 
credits available for the increased production of 
substance requisite to bring return on the invest- 
ment, nor would there be sale for the increased 
volume of substance produced. 

These extreme suppositions cast light upon 
what really does happen when disproportionate 
investment has been made in utilities of any kind. 
For example, a common form of disproportionate 
investment is in instruments of production with 
capacity for the transformation of substance or of 
intermediate utilities in excess of the demand for 
the final utilities into which they are transformed. 
This is colloquially designated as having too much 
** locked up in fixed capital.'' If an individual is 
to continue applying his effort in production, he 
must expend of his credits in the proportions that 
maintain the man-days from which his effort ema- 
nates. If a business organization is to continue 



368 THE FLOW OF VALUE 

in production, it must expend of its credits in due 
proportions for wages and that which it utilizes. 
If a nation is to continue in production, all of the 
accumulated credits of its citizens must be ex- 
pended in the proportions that further production. 

Variation in the Purchasing Power of the Dollar 

The dollar at any given time gives command 
over the measures of respective utilities that then 
have the exchange ratio of the dollar. Therefore 
all wage-workers, who at a given time and place 
receive the same number of dollars as wages, have 
the same command over the same measures of util- 
ities. If the prices expressed in dollars of several 
utilities be advanced, the same wage expressed in 
dollars would give command over smaller meas- 
ures of these utilities. Thus while wage ex- 
pressed in dollars would remain the same, the 
purchasing power of that wage would have di- 
minished, and therefore the man-hours applied 
by the wage-worker would not give him command 
over the same volume of want-units. On the other 
hand, if there be a decrease in the price of these 
utilities as expressed in dollars, a given wage will 
buy more want-units. The ultimate test, there- 
fore, by which wage at one time and place may be 
compared with wage at another time or place is 
not the dollars in which it is expressed, but, the 
want-units which may be purchased with the man- 
hours applied. 



SUMMARY, RESTATEMENT 369 

The changing relations between effort applied 
and wants met that cause a rise or fall in the price 
of one utility or of several utilities, may through 
extended periods cause a rise or a fall in the prices 
expressed in dollars of virtually all utilities. 
Thus, during periods of transition from prosper- 
ity to depression and from depression to pros- 
perity, the ratios of effort applied to wants met 
are expressed at different times by a widely vary- 
ing number of dollars. It may be that the wages 
expressed in dollars received for the application 
of a given number of man-hours at one time will 
then buy more want-units than can be bought at 
another time with the wages expressed in a 
greater, even a considerably greater number of 
dollars then received for the application of an 
equivalent measure of effort. It may be that the 
profit expressed in a given number of dollars re- 
ceived from the sale of a given measure of utili- 
ties at one time will then buy greater measures of 
man-hours than can be bought at another time 
with profit expressed in a greater number of dol- 
lars then received from the sale of an equivalent 
measure of utilities. It may be likewise with rent 
and with interest. 

For example, if the population were to increase 
much more rapidly than the production of the 
essential utilities, or if because of universal scant 
crops the supply was in decreasing ratio to the 
demand, it would follow that the same number of 



370 THE FLOW OF VALUE 

dollars which had bought these utilities in certain 
proportions would no longer buy them in these 
proportions. Man-hours applied would not have 
command over the same number of want-units. 
All persons would have to pay more of the dollars 
to their credit for these utilities if they bought 
them in the same proportions as before. As every 
person would have fewer of dollars remaining 
after he had purchased these essential utilities, a 
number of persons in the descending scale of in- 
comes would have to do without nonessential utili- 
ties and others would have to do without both non- 
essential and less essential utilities ; and those with 
smallest incomes would be unable to buy even 
these essential utilities in the proportions requisite 
to maintain their productivity. As the demand 
for nonessential utilities and less essential utilities 
decreased, employers engaged in their production, 
if they paid the same total of dollars as wages, 
would have to obtain more dollars for their prod- 
ucts. But if they were to obtain a higher price 
expressed in dollars, the demand for their prod- 
ucts would further diminish. They would be 
obliged to dispense with the services of a number 
of their employees. As producers of utilities of 
many kinds reduced the number of their employees, 
there would be an increasing number who would 
compete for employment. The tendency would be 
for wages as expressed in dollars to be reduced. 
Therefore a still further increasing number of 



SUMMARY, RESTATEMENT ^71 

persons would have to dispense with nonessential 
and less essential utilities. Their production 
would be further decreased; employers engaged 
in that production would discharge more of their 
employees. 

As employees were discharged and many em- 
ployers ceased production, the demand for the 
essential utilities, the advance in the price of 
which had brought about the depression, would 
diminish. In the extreme, the aged and infirm, 
sickly children, all of those on the margin of exist- 
ence, would perish. It was an inadequate supply 
of these essential utilities that brought about the 
advancing prices and the ensuing diminution in 
the production of other utilities. It may be that 
the higher prices expressed in dollars for essen- 
tial utilities would for a time give the producer of 
substance greater command over other utilities, 
but the curtailment of the production of other util- 
ities would bring higher prices expressed in dol- 
lars for them, and thus farmers and other pro- 
ducers of substance would have to pay higher 
prices expressed in dollars for all the things they 
purchased. 

The decrease in the supply of the essential utili- 
ties would mean the impairment of the productive 
efforts of a portion of the population. If there 
were no increase in their production there would 
not only be. a continued diminution in the produc- 
tion of other utilities, but a large proportion of 



372 THE FLOW OF VALUE 

the population would remain out of employment. 
The unemployed would have to work where they 
could find employment. There would be an in- 
creasing number of those who would have to 
apply their efforts directly in return for food and 
shelter. They would have to turn to the farmers 
who produce food and can supply some sort of 
shelter. Thus while the farmers might not in- 
crease the volume of substance in relation to the 
effort applied, they would, because of the greater 
total of effort applied, increase the total volume in 
relation to population. The effort of a greater 
portion of the population would be applied in the 
production of the essential utilities, and a smaller 
proportion would remain for the production of 
other utilities. 

As wage-workers competed for employment, 
wages expressed in dollars would be reduced. As 
employers in nearly all kinds of production paid 
smaller totals of dollars as wages, they would pro- 
duce utilities at a lower cost in dollars and there- 
fore could sell them at a lower price in dollars. 
They might obtain profit from a volume of sales 
that during a period of higher wages expressed in 
dollars would not have yielded profit. As their 
profit increased it would give command over the 
efforts of an increasing number of those out of em- 
ployment. If the production of the essential util- 
ities were increased in relation to tha effort ap- 
plied, increasing proportions of effort could be 



SUMMARY, RESTATEMENT 373 

applied in other production, and thus there would 
be the rising tide of prosperity. 

In the various stages of the transition from 
prosperity to depression and depression to pros- 
perity, the dollar indicates varying relations be- 
tween man-hours applied and want-units pro- 
duced. There would at any stage of the transi- 
tion be a greater or less command of man-hours 
applied in one kind of production over man-hours 
applied in other kinds of production. It also 
would mean that the same relation between wages 
and prices would be expressed at different periods 
by a different number of dollars. That is, a given 
number of man-hours applied during prosperity 
might have a higher ratio to the dollar than the 
same number of equivalent man-hours applied 
during depression; and likewise a given number 
of want-units might have a lower ratio to the dol- 
lar in a time of depression than an equivalent 
number of want-units of the same kind in a time 
of prosperity. As depression deepens, prices of 
want-units expressed in dollars fall more rapidly 
than wages expressed in dollars. This means that 
diminishing demand affects the want-utilities pro- 
duced before it affects the man-hours applied in 
their production. It is the diminishing demand 
of purchasers for the want-utilities that causes 
diminishing demand of employers for employees. 
As prosperity advances, prices of want-units ex- 
pressed in dollars rise more rapidly than wages 



374 THE FLOW OF VALUE 

expressed in dollars. Increasing demand of pur- 
chasers for want-utilities leads to an increasing 
demand of employers for employees in their pro- 
duction. 

It is the credits received by employers from the 
sale of utilities for the production of which they 
are responsible that give them command over 
man-hours to be applied in further production. 
If the prices of want-units as expressed in dollars 
rise, a given number of dollars will not give com- 
mand over the same number of man-hours. If the 
prices of want-units as expressed in dollars fall, a 
given number of dollars will purchase a greater 
number of man-hours. If wages as expressed in 
dollars rise, an employer, other things equal, will 
receive from the application of a given proportion 
of effort smaller profit. If wages as expressed in 
dollars fall, the employer, other things equal, will 
receive from the application of a given proportion 
of effort a higher profit. Thus at different times 
different degrees of profit as expressed in dollars 
may be derived from the application of the same 
proportion of effort in the production of the same 
volume of utilities. Likewise the same measure 
of profit as expressed in dollars may at different 
times give command in the form of prices over 
different volumes of want-units, and therefore in 
the form of wages over different measures of man- 
hours. 

During a period of deepening depression profit 



SUMMARY, RESTATEMENT 375 

of all business organizations tends to decline, divi- 
dends on stocks tend to be reduced or passed. 
And in the extreme there may be doubt that inter- 
est will be paid on bonds. Therefore the prices 
obtainable for stocks and bonds will decline. The 
decline may be precipitated by those foreseeing 
the depression, who offer securities for sale, and 
during the depression by those whose resources 
are so reduced that they will be obliged to sell se- 
curities to obtain immediately utilizable credits. 
This increasing supply of securities for sale will 
be coincident with a falling demand. Because of 
the general diminution of profit there will be fewer 
persons with credits that can be devoted to their 
purchase. As with rising prosperity such organ- 
izations again obtain the profit that enables them 
to resume or to increase the payment of dividends, 
the prices of stocks and bonds tend to rise. The 
rise is accelerated as credits again accumulate in 
the possession of those who desire to invest them. 
Changes in the purchasing power of the dollar, 
that is in the value of the dollar, such as have been 
indicated in the immediately preceding pages are 
due solely to varying interrelations between the 
supply of and the demand for man-hours to be ap- 
plied in production and for the want-units pro- 
duced. They typify changes in the relations be- 
tween effort applied and wants met that give rise 
to what in essence is the dollar. In the actual de- 
velopment of industry and commerce the value of 



376 THE FLOW OF VALUE 

the dollar has been determined in part by such 
changing interrelations, and in part by changes in 
the supply of what is called money, which have 
not always coincided with changes in the interre- 
lations between the supply of and the demand for 
utilities. 



XX 

MONEY 

Under the adjustment of buying and selling by 
debit and credit entries of record, the production 
of utilities would increase as there was increase 
in the application of effort, and in the effectiveness 
of its application. The volume of production 
w^ould be limited only by the matter to which force 
was applied, and by the force applied to it. The 
flow of debits and credits would be limited only by 
buying and selling in accordance with the inter- 
relations between supply and demand. 

The actual development of the mechanism of 
buying and selling, especially in its earlier stages, 
was very different from the hypothetical develop- 
ment outlined in Chapters V to IX, and often im- 
posed other limits upon the volume of utilities 
produced and sold. The later stages of the actual 
development have more closely approximated 
those of the hypothetical development. 

The supposititious debit entries and credit en- 
tries of the early stages of the hypothetical devel- 
opment were of the nature of records of transac- 
tions. The keeper of the supposititious record 
would have had no assurance that the certificates 

377 



878 THE FLOW OF VALUE 

wliich came to him were exact records of actual 
transactions, except the integrity of his deposi- 
tors. The honesty and accuracy of the keeper of 
the record would be the only assurance of the de- 
positors that he did not make debit entries and 
credit entries to the account of one or another that 
did not arise from actual transactions. A certifi- 
cate of any depositor would have to be accepted by 
the custodian of the record as evidence of the sale 
of utilities for the units of exchange specified, and 
all entries would have to be accepted as veritable 
record of such transactions. There was not at the 
time of the first buying and selling the intelligence 
that could have conceived such a system. The 
predatory instinct implanted in the nature of man 
and which has not as yet been entirely eradicated 
makes it impossible even to imagine that there 
ever was, or is now, the universal integrity requi- 
site to the installation and continuance of such a 
system. 

Moreover, the first buying and selling was not 
of a nature that would give rise to such a concep- 
tion. Then the effort expended in the production 
of things that were exchanged, and in the exchange 
of things for things, was a small part of human 
activity. The intermediary of exchange at first 
was the kind of a thing useful in itself and in 
common use. Such an intermediary evolved into 
the coin. A coin was accepted in exchange be- 
cause it was a definite, concrete thing, which every 



MONEY 379 

person knew every other person would accept. 
Intermediaries of exchange came to be designated 
as money. As anybody could get anything he 
wanted with money, everybody wanted money. 
Thus money came to be regarded not primarily 
as that which facilitated exchange, but that with 
which things were bought and for which things 
were sold. This led to the conception that the 
primary object of buying and selling was to get 
money. As the human being of low mental devel- 
opment is ever allured by that which is bright and 
shines, productivity may have been stimulated by 
the desire to obtain gold and silver as those lus- 
trous metals were made into coins. 

It is obvious, however, that as things were ex- 
changed for money and money was exchanged for 
things, there would have to be determined the 
measure in which things of any kind would ex- 
change for a given measure of money. Thus there 
would have to be a unit of money in terms of which 
would be expressed the respective measures of 
different things which could be obtained in ex- 
change for that unit. That monetary unit could 
be a coin of any kind of metal; it could be of any 
specified weight and bear any agreed and accepted 
designation. The coin most frequently used natu- 
rally would be of such a weight and size that a 
number of them readily could be carried on the 
person and conveniently be passed from one per- 
son to another. The unit of exchange naturally 



380 THE FLOW OF VALUE 

designated such measures of utilities as commonly 
entered into exchange. Thus the designation of 
the coin most commonly in use and the designation 
of the unit of exchange would tend to coincide. 
To facilitate the buying and selling of smaller or 
larger measures of utilities there would come to 
be other coins bearing a fractional or a multiple 
relation to the coin of common use. For the pur- 
pose of this immediate discussion, it will suffice to 
designate the coincident unit of exchange and 
monetary unit simply as the coin. 

The question arises as to how there would be 
determined the measures in which respective utili- 
ties would be exchanged for the coin. A certain 
measure of utilities of each particular kind would 
have to be paid for the coin, which is the same as 
to say that a coin would buy a certain measure of 
utilities of each particular kind. Thus, notwith- 
standing the delusion that money was the primary 
object of attainment, everybody except the miser, 
either consciously or subconsciously, would seek 
money for what he could obtain with it. Other- 
wise the coin would not be the unit of exchange; 
it would not be money. Inevitably the ratio of 
utilities to the coin would be fixed by the ratio of 
utilities to utilities as deterniined by their respec- 
tive relations to human wants. In a condition of 
untrammeled production and exchange, such as 
has been presupposed in the hypothetical develop- 
ment, the ratio of utilities to the coin would be 



MONEY 381 

determined in the same manner as the ratio of 
utilities to the dollar as outlined in that develop- 
ment. Instead of each sale being accompanied by 
debit entries of record, it would be consummated 
by the passing of coin from buyer to seller. The 
parting with coin obtained in a previous sale of 
utilities would serve the same purpose as a debit 
entry against a credit entry. The coin that 
passed to the seller would serve the same purpose 
as an entry to his credit. Those most effective in 
production or in buying and selling would, other 
things equal, receive the greatest number of coins, 
would expend coins in smaller proportions than 
the less effective, and thus the money in their pos- 
session would increase. As any one obtained a 
surplus of coins over those necessary to supply 
his wants, he could extend his business or he could 
purchase other utilities, and thus be instrumental 
in furthering the development of other specialized 
vocations. 

The use of the coin, however, would have an 
effect upon prices for which there is no counter- 
part in our hypothetical development. Under 
that development there would be no limit to the 
number of dollars of record except the prices of 
utilities and the volume of transactions. That is, 
the dollars of debit entry and credit entry would 
be limited alone by the volume of production for 
which there was demand. When, however, the 
coin was the sole intermediary of exchange, the 



382 THE FLOW OF VALUE 

only exchanges that were possible were by the bar- 
tering of utilities directly for utilities, or the ex- 
change of utilities for coins. But, because of the 
insurmountable inconvenience of barter, as pro- 
duction increased in volume and variety, ex- 
changes by barter necessarily became so few in 
relation to those for coin that transactions virtu- 
ally were limited by the quantity of coin in ex- 
istence. This would be the case even though, 
because of a greater *^ rapidity of circulation '* 
or * Velocity of circulation,'^ a greater num- 
ber of exchanges were effected with a given 
quantity of coin at one time or place than at 
another time or place. As coin was the ac- 
cepted and customary intermediary of exchange, 
virtually every one who wanted to sell would en- 
deavor to obtain coin, and every one who wanted 
to buy would be obliged to have coin for payment. 
Therefore, when coins were abundant in relation 
to the transactions to which demand and supply 
gave rise, a greater number of coins could be 
obtained for a given measure of utilities than 
when coins were scant in relation to the transac- 
tions it was desired to effect. That is, the ratio 
of utilities to the coin would tend to be determined 
not only by the various interrelations between 
supply and demand dependent upon human activ- 
ity and human wants, but also by the available 
quantity of coins. While the ratio of utilities of 
a given kind to utilities of other kinds would rise 



MONEY 383 

and fall with variations in the interrelations be- 
tween supply and demand, the ratio of all utilities 
to the coin would rise and fall as transactions 
were greater or less in relation to the available 
supply of coins. It is inconceivable but that, when 
the available supply of coin did not increase dur- 
ing a considerable period in which there was im- 
petus to increasing production, buying, and selling, 
that impetus would be checked by the diminishing 
proportion of available money. Coins would be 
obtained in exchanges that were imperative; in 
others they would be more difficult of attainment ; 
transactions that otherwise might have taken 
place would be prohibited by the lack of coins. 
The exchange ratios of utilities in general would 
increase in relation to the coins ; prices expressed 
in terms of the coin would fall. On the contrary, 
if at a given time there were an increase in the 
supply of coins in vastly greater proportion than 
the increase in the transactions which it was de- 
sired to effect, coins would be easier to obtain. 
The exchange ratios of utilities in general would 
decrease in relation to the coin ; prices expressed 
in terms of the coin would rise. 

For example, let it be supposed that at a given 
time the price of a given utility was one coin for 
four units : then the exchange ratio of that utility 
to the coin would be four to one : four units of the 
utility would buy one unit of the coin, and one unit 
of the coin would buy four units of the utility. 



384 THE FLOW OF VALUE 

Thus the price of the unit of coin in terms of the 
utility would be four; and the price of the unit 
of utility in terms of the coin would be one-fourth. 
If at a subsequent time the price of that utility 
became one coin for three units, three units of that 
utility would buy one unit of coin, and one unit 
of coin would buy three units of the utility. The 
exchange ratio of the utility to the coin would 
have decreased, becoming three to one. The price 
of the unit of coin in terms of the utility would 
become three, and the price of the unit of utility 
in terms of the coin would become one-third ; that 
is, the price of the utility expressed in terms of 
the coin would have risen. Or if at a subse- 
quent time the price of that utility became one 
coin for six units, six units of the utility would 
buy one unit of coin, and one unit of coin would 
buy six units of the utility. The exchange ratio 
of the utility to the coin would have increased, be- 
coming six to one. The price of a unit of coin in 
terms of the utility would become six, and the 
price of the unit of the utility in terms of the 
coin would become one-sixth; that is, the price 
of the utility in terms of the coin would have 
fallen. Thus when coins were abundant in rela- 
tion to utilities in general, more of coins would 
have to be paid for a given measure of a utility; 
the price of the utility as expressed in coin would 
rise because more coins would have to be paid for 
it. On the contrary, when coins were scant in re- 



MONEY 385 

lation to utilities in general, it would take a 
greater measure of utilities to buy a coin ; the price 
of the utility as expressed in coin would fall be- 
cause less of coin could be obtained for it. 

There is yet another radical difference between 
our hypothetical development and the actual de- 
velopment through the use of coin. Requisite to 
the certificate that passed from the buyer to the 
seller and the making of the debit entry and the 
credit entry at the time of each transaction would 
be nothing else than writing utensils and books of 
record. But requisite to exchange by means of 
coins are metal and means of coining. The metals 
were also utilized in the making of various utili- 
ties, but it was their use in coins that gave them, 
especially the precious metals, a wider usefulness. 
The utilities of ordinary use are bought when they 
are wanted and sold when there are purchasers. 
But as all utilities were sold for coin and all utili- 
ties were purchased with coin, the use of the 
metals as money caused other utilities to be ob- 
tained for them in greater measure than if they 
had not been so used. It also follows that those 
who supplied the metals used for coins were en- 
abled to obtain utilities in return for their efforts 
put forth in the production of those metals. That 
is, they obtained utilities without engaging in the 
production of utilities that directly ministered to 
the wants of the body or the mind. In increasing 



386 THE FLOW OF VALUE 

degree it was the usefulness of the precious metals 
as intermediaries for the exchange of utilities that 
gave them value. 

It came about that those who obtained coins 
which they did not use in buying and selling them- 
selves, loaned them to others, making a charge for 
their use. Thus evolved usury, a word that be- 
came opprobrious because, before there was a con- 
siderable development of industry and commerce, 
the loan of money in nearly all cases was to those 
in need, the money-lender obtaining gain because 
of their adversity. But as industry and commerce 
progressed, the loaning of money came to be in 
greater proportion to those engaged in production, 
buying, and selling. The payment for its use in 
facilitating production canie to be designated as 
interest instead of usury. As the word * inter- 
est'' in this case means *^a claim to,'' ^Hhe right 
to participate," it does not connote payment for 
the use of money so much as payment to the owner 
of that to which he has claim, which includes a part 
of that produced by the utilization of money pro- 
vided by him. The change in the designation was 
concurrent with the change in the significance. 

It became virtually irnpossible for any business 
to be conducted without money. A person having 
sources of substance needed money wherewith to 
pay wages for their cultivation, and for gathering 
and extracting substance. A person transform- 
ing substance, whether into instruments of pro- 



MONEY 387 

duction or into final utilities, needed money where- 
with to purchase it. Merchants who bought utili- 
ties for subsequent sale needed money wherewith 
to pay for them. No one could continue in busi- 
ness unless he had the money requisite to the buy- 
ing and selling essential to that continuity. Thus 
the supplying of money to those who needed it 
became a business of great importance. The sup- 
plying of money was of a different nature from 
supplying utilities for use and consumption, be- 
cause he who supplied money received money back 
again. Thus those who supplied money were 
known as money-lenders. 

It became the practice of those owning coin or 
bullion to deposit it for safety with the keeper of 
a chest. The keeper of the chest, the caisse, be- 
came the cashier and evolved into the banker. 
Thus was the beginning of the modern bank. It 
became the practice of a bank to issue notes prom- 
ising to pay coin instead of the coin itself. Those 
believing that a bank would redeem its promise on 
demand would accept the bank note in lieu of coin. 
The first issues of notes called for no more coin 
or bullion than a bank had in its custody. But as 
a bank note was transferred between buyers and 
sellers in a succession of transactions, it came to 
be the practice of many a bank to issue notes prom- 
ising to pay in the aggregate more coin than it had 
in its custody. Within limits it was safe in doing 
this because of the outstanding notes only a por- 



S88 THE FLOW OF VALUE 

tion were presented for redemption from time to 
time. Governments that purchased bullion for 
transformation into coin also issued notes promis- 
ing to pay coin on demand, and these also came to 
be issued by many a government in excess of the 
coin or bullion held against the notes. 

Thus the issue of bank notes and government 
notes not only obviated the necessity for the actual 
transfer of coin at every purchase, and its often 
inconvenient and hazardous conveyance from 
place to place, but it also augmented the supply 
of money. As bank notes and government notes 
were promises to pay coin, the coin remained the 
unit of exchange. The ratio of utilities to the unit 
of exchange continued to be determined not only 
by various interrelations between human effort 
and human wants, but also by the relation of the 
available supply of money to the volume of trans- 
actions it was desired to effect. When the supply 
of ** currency, ' ' the term including coin, govern- 
ment notes, and bank notes, was abundant in rela- 
tion to the transactions it was desired to effect, 
prices expressed in terms of the coin would be 
high. When the supply of currency was scant in 
relation to the transactions it was desired to 
effect, prices expressed in terms of the coin would 
be low. Prices obtainable at a future time for 
utilities produced in the present might fluctuate, 
not only because of variations in the interrelations 
between the supply of and demand for utilities, 



MONEY 389 

but because of variations in the supply of and 
demand for money. 

When coin was deposited with the keeper of a 
chest, it was subject to payment on the order of the 
owner, either to himself or to another, and it was 
so also as government notes and bank notes came 
into use and entered into the deposits made in 
banks. With the continuous making of deposits, 
it came about that the orders upon a bank at any 
given time called usually for the payment of only 
a fraction of its total deposits. Thus a bank came 
to loan that portion of its deposits for which it 
believed there would not be demand until the loans 
were paid. For such loans it obtained interest. 
It was necessary that a bank keep a reserve of 
coins for the payment of bank notes of its issue 
upon demand, and a reserve of currency for the 
payment of checks upon it for which currency was 
demanded. 

When an order — what we now designate as a 
check — was drawn upon a bank by a depositor in 
that bank in favor of another depositor in that 
bank, all that was necessary to the adjustment was 
for the bank to debit the account of the drawer of 
the check and to credit the account of the payee. 
That is, debit entry and credit entry were made 
on the books of the banks which involved no trans- 
fer of coin, government notes, or bank notes. 
When there was the attainment of this stage in the 



390 THE FLOW OF VALUE 

actual development of the mechanism of exchange, 
its course came to have a certain approximation 
to that of our hypothetical development. 

When it was perceived that a check drawn upon 
one bank in favor of a depositor in another bank 
could be deposited in that other bank, there cred- 
ited to the depositor, and thence forwarded to 
the bank upon which it was drawn, to be there 
debited to the drawer, the proportion of coin, bank 
notes, or government notes required in effecting 
transactions vastly diminished in relation to the 
volume of the transactions. As there came to be 
the drawing of checks upon one bank that were 
deposited with another bank, there also came to be 
the drawing of checks upon the other bank that 
were deposited with the first bank. Each bank 
would forward to the other for collection the 
checks that were drawn upon it. This practice so 
increased, especially in the United States, that 
checks drawn upon any bank in the country could 
be deposited with any other bank. Then devel- 
oped the practice of one bank keeping an account 
with another. As checks drawn upon one bank 
were deposited with another and vice versa, en- 
tries on the books of each bank were made to its 
debit and to the credit of the other, currency not 
being required except in the settlement of a bal- 
ance due from one to another. As it was imprac- 
ticable for every bank to have an account with 
every other bank, it came to be the practice of the 



MONEY . 391 

banks in a certain area to keep an account with a 
large bank in a principal city. Then all of the 
checks drawn against the banks of that area were 
forwarded by them to the banks of the principal 
city, with which they respectively had accounts. 
A bank in that area would need to send currency 
to its correspondent bank in the large city only 
when it was necessary to pay a balance to its debit. 
The banks in the city presented one to another the 
checks received by each that were drawn upon an- 
other, currency not being necessary except in the 
settlement of the balance by which the amount of 
the checks drawn upon one bank exceeded the 
amount of those drawn upon another. 

In certain of the larger cities there has been a 
further development which has obviated the neces- 
sity for the transfer of currency from one bank to 
another even in the settlement of balances. At 
the clearing house, an institution where represent- 
atives of the banks of the city assemble daily with 
the checks received by their respective banks, each 
of these banks has on deposit coin and government 
notes in an amount larger than necessary to cover 
any balance that probably will result from any 
clearing. On the books of the clearing house after 
each clearing, each bank is debited with the bal- 
ance against it, or credited with the balance in its 
favor. As an entry is made to its debit, currency 
in that amount passes from its credit in the clear- 
ing house to the credit of the various banks in the 



392 THE FLOW OF VALUE 

amounts respectively due them. Thus on the 
books of banks, checks are offset against checks; 
on the books of the large banks in a principal city, 
checks drawn against many banks in a large area 
are offset against checks drawn in favor of these 
respective banks ; and in a very large city checks 
drawn against each of a multitude of banks that 
have accounts with the banks of that city are offset 
against checks deposited with them that have been 
drawn against other banks. Thus the proportion 
of currency required in the transactions of indus- 
try and commerce has so fallen that it has been 
estimated to be less than 10 per cent, of the aggre- 
gate. 

The fact that there is not at any time in exist- 
ence more than a small fraction of the coin, gov- 
ernment notes, and bank notes that would be re- 
quired to effect the volume of transactions at that 
time in case currency were demanded in each 
transaction strongly indicates that the measures 
in which respective utilities are bought and sold, 
are no longer determined in more than a small 
degree by the volume of such currency. The ratio 
of utilities to the dollar is determined primarily 
by the various interrelations between supply and 
demand that depend upon human activity and 
human wants. The belief still held by many that 
these ratios are determined solely by the relation 
of the volume of utilities, and the volume of trans- 
actions to the volume of money, is a lingering sur- 



MONEY 693 

vival of the conception engendered in the period 
before the adjustment of transactions by checks 
and entries on the books of banks vastly exceeded 
the adjustments effected by the direct passing of 
currency. 

Inasmuch, however, as the unit of exchange is 
expressed in terms of the monetary unit, which 
signifies a given weight of gold, it is still required 
that gold shall be paid for a government note or a 
bank note upon demand. It is also required that 
currency shall be paid for a check upon demand. 
As bank notes and government notes are redeem- 
able in gold, it is thus virtually decreed that a 
check shall be paid in gold upon demand. It is 
obligatory upon the Government to keep a reserve 
of gold from which government notes can be re- 
deemed, and that a bank keep a reserve of cur- 
rency from which checks may be paid upon de- 
mand. Various calculations have been made at 
various times of the ratio which such a bank re- 
serve shall bear to its deposits. This reserve has 
varied from 25 per cent, to about 6 per cent. If, 
for example, it be decreed that a bank shall have 
reserve to the amount of 10 per cent, of its de- 
posits, it can not make entry of deposits in an 
amount greater than ten times its reserve; or, 
rather, it must always build up its reserve to an 
amount not less than 10 per cent, of its deposits. 
In this case the aggregate of all credit balances in 
all of the banks at a given time could not exceed 



394 THE FLOW OF VALUE 

ten times the reserve in the possession of these 
banks. Therefore the volume of transactions at 
times may be limited by the requirement as to the 
reserve, just as in the period when coin was the 
only money the volume of transactions may at 
times have been limited by the available supply of 
coin. ** Scarcity of money,'' occasioned by the in- 
ability of the banks at a particular time to increase 
their reserve, and therefore to allow further in- 
crease in their deposits, leads to an increase in the 
rate of interest charged for loans, and thus may 
cause a diminution in the flow of utilities. The 
proportion which it has been decreed the reserve 
must bear to deposits has tended to diminish. 
The greater the degree in which transactions are 
effected by means of checks without the use of 
currency, the greater is the degree in which there 
is buying and selling through the instrumentality 
of debit entries and credit entries on the books of 
banks. And, therefore, the greater is the degree 
in which the actual development of the mechanism 
of exchange coincides with the mechanism of our 
hypothetical development. 

To the attainment of this, the present stage, has 
been necessary a tremendous advance in the per- 
ception of what production, buying, and selling 
really mean, and a subduing of the predatory in- 
stinct. In times past monarchs have debased 
coin, governments and banks have issued notes in 
excess of the amount for which there was any pos- 



MONEY 395 

sibility of redemption. These practices have, at 
times and places, led to such uncertainty as to 
what really could be obtained for currency in cir- 
culation, as to cause the prices of utilities to fluc- 
tuate violently. Such fluctuation has been aside 
from any variation caused by changes in the inter- 
relations between supply and demand. Coin and 
notes have been counterfeited. Depositors in 
banks have resorted to subterfuge in order to ob- 
tain credit entries in excess of those legitimately 
acquired through the sale of utilities. Directors, 
officers, and employees of banks have at times vio- 
lated their trust by direct theft, and at times by 
indulgence in or connivance at other unwarranted 
practices. But as banking operations have more 
and more come to be safeguarded, the adjustment 
of transactions by means of checks and debit and 
credit entries has come more and more to approxi- 
mate the status of the adjustment of our hypo- 
thetical development. 

The custodian of our hypothetical place of rec- 
ord would not need to have resources of his own 
beyond those necessary for his subsistence. It is 
different with an actual bank. It must have prop- 
erty in resources which it maintains against the' 
bank notes it has issued. Inasmuch as it makes 
loans, it must have resources wherewith to sustain 
loss in case they are not paid. It must have re- 
sources wherewith to make good losses incurred. 



396 THE FLOW OF VALUE 

whether from defection of depositors, or defection 
due to lack of honesty, or lack of judgment on the 
part of its officers and employees. A prudent 
bank will not accept the account of a depositor 
without assurance that he has resources wherewith 
he can make good losses that otherwise would fall 
upon the bank. 

As the proportion of transactions adjusted by 
means of checks and bank entries has come vastly 
to exceed those adjusted by the passing of cur- 
rency, banks have necessarily come to rely in great 
measure upon the honesty of the depositors and 
the depositors upon the honesty of the banks. 
Safeguards against dishonesty have promoted in- 
tegrity, but the waning of dishonesty is due in 
greater degree to the force that has prompted the 
safeguards, the force of the widening conviction 
that modern business can not be conducted without 
the integrity of all of those engaged in its proc- 
esses. If absolute honesty had actually been ob- 
tained, and there were universal recognition of 
the fundamental significance of production, buy- 
ing, and selling, a bank, in so far as the receipt of 
checks and the making of entries is concerned, 
would need to be no more than the place of record 
of our hypothetical development. The modern 
bank, however, performs other functions. 

Before passing to a discussion of these func- 
tions, it is desirable again to emphasize the fact 



MONEY 397 

that the more highly developed the practice of 
adjusting transactions by means of checks, drafts, 
bills of exchange, acceptances, and other instru- 
ments which give rise to debit and credit entries 
of bank record, the greater is the degree in which 
prices, as expressed in units of exchange, are de- 
termined by interrelations between the supply of 
and demand for various utilities; and the less is 
the degree in which prices, as expressed in units 
of exchange, are determined by the supply of 
money in existence. As it is the buying and sell- 
ing of utilities that give rise to debit entries and 
credit entries of bank record, the volume of money 
in the form of bank credit tends to depend upon 
the volume of buying and selling, and not upon the 
volume of currency. Before such adjustment of 
payments had developed, those who bought and 
sold were bidders not only for the utilities that 
were bought and sold, but they were bidders also 
for the supply of currency with which payments 
were effected. 

If the ratios of utilities to the dollar were deter- 
mined solely by interrelations between force ap- 
plied and wants met, the prices of all utilities 
could not simultaneously rise nor could they si- 
multaneously fall. Ordinarily, when we say that 
prices are rising, we mean no more than that of 
certain kinds of utilities smaller measures than 
theretofore have the exchange ratio of one dollar. 
Of certain other utilities, it may be that the same 



398 THE FLOW OF VALUE 

measures can be obtained for the dollar, while of 
still other utilities it may be that larger measures 
can be obtained for the dollar. It would be differ- 
ent if at a given time only one-half the measure of 
all utilities could be obtained for one dollar as at 
a preceding time. Then we should say that prices 
had doubled. But only apparently would they 
have doubled. While it would take twice as many 
dollars to obtain the same measure of any utility 
as at a preceding time, the actual exchange ratios 
of utilities would be the same, and, therefore, the 
actual prices would be the same. 

Thus in a period when coin was the only cur- 
rency, the prices of all utilities, as expressed in 
units of exchange, might rise or fall with approxi- 
mate simultaneity. For example, if a sudden in- 
flux of gold, caused by the opening of new mines, 
were to have doubled the supply of gold, it might 
be that for a gold dollar only one-half the measure 
of utilities of any kind could be obtained at a given 
time as at a preceding time; that is, it would re- 
quire two gold dollars to purchase the same meas- 
ure of utilities of any kind as at the preceding 
time. Obviously, this would not be an actual in- 
crease in prices. It would be merely halving the 
unit of exchange, and giving the half the same 
designation as previously applied to the whole. 
Similarly, when government notes and bank notes 
entered into the currency, if at a given time the 
supply of this paper currency suddenly were 



MONEY 399 

doubled, it might be that the prices of all utilities 
apparently would be doubled. But here again the 
prices would really not be doubled ; here again the 
unit of exchange would be halved and the half be 
given the designation previously applied to the 
whole. 

Essential to the use of any form of money is the 
belief of those who accept it that they can obtain 
in exchange for it utilities having the exchange 
ratio indicated on its face. This belief found 
immediate concrete substantiation when utilities 
were exchanged directly for other utilities. Sub- 
stantiation was likewise concrete, but in somewhat 
less degree, when utilities were exchanged for coin. 
The substantiation is only potentially concrete 
with other forms of currency, the use of which de- 
pends upon belief in the integrity of the govern- 
ment or bank of issue. This potentiality is real- 
ized when coin is demanded in exchange for bank 
notes and government notes, but this realization 
depends upon there not being the simultaneous de- 
mand for the redemption in gold of bank notes and 
government notes in an amount exceeding the 
amount of the gold available for their redemption. 
This belief in the case of bank credit finds substan- 
tiation in the confidence that for the amount speci- 
fied in a check on a bank, and in credit of bank 
record, property can be obtained in utilities hav- 
ing the ratio of exchange indicated by the amount 
of the credit. The reserve of specie held against 



400 THE FLOW OF VALUE 

deposits is only a fraction of these deposits. It 
would be impossible for all checks to be redeemed 
in gold in case gold is demanded for them. This 
is demonstrated in case of a panic when the banks 
in order to conserve their supply of gold refuse to 
pay out gold ; that is, by their refusal to pay gold 
at the time when it is in greatest demand. There- 
fore, the basis of what is called money is property 
in utilities, or in that which gives command over 
utilities. Therefore, the ultimate basis of money 
is value. 

The development of the mechanism of exchange, 
in so far as it can be traced throughout the histo- 
rical period, has been through stages that doubt- 
less could not have been other than they were, or 
in different sequence. It would be interesting to 
know what mechanism would be adopted if the 
civilized world were suddenly thrown into a state 
of coma, from which it emerged with the fullest 
recollection of all that pertained to production, 
buying, and selling, but absolutely without recol- 
lection of coins, currency, or banking. It is incon- 
ceivable that with the intelligence prevailing in all 
matters except this, there could be the reversion to 
barter, or to the use of such things as cattle, shells, 
or tobacco as intermediaries. It is even improb- 
able that there would be reliance exclusively upon 
the metals as money. An inkling of what might 
happen is afforded by two examples of what ac- 



MONEY 401 

tually has happened when the mechanism of ex- 
change has been deranged. 

During the panic of 1893, when currency was 
unobtainable froni the banks, certain mining com- 
panies, lumber companies, and even merchants in 
out-of-the-way places, issued scrip — pieces of 
paper on which were respectively printed prom- 
ises to pay a dollar, or a multiple of a dollar, or a 
fraction of a dollar. This scrip was accepted for 
utilities and paid for utilities in the communities 
of issue without thought that it ever would be re- 
deemed in gold. It became currency because of 
the belief that utilities could be obtained for it, 
and because of reliance upon the integrity of the 
source of issue. After the revolution in Russia 
had so disorganized the financial structure that 
there was no belief that gold or silver could be 
obtained for notes issued by the government, 
** grain notes'' and ^^ goods notes'' were issued in 
many places, and accepted by peasants, artisans, 
and shopkeepers in preference to government 
notes. Thus even in that desolated and benighted 
country arose the perception that money is ac- 
tually based on utilities, and not upon the metals, 
however precious. 



XXI 

DEVELOPED FUNCTIONS OF A MODERN BANK 

As an important function of the old-time money- 
lender was the supplying of money in return for 
the receiving of interest, so also an important 
function of a modern bank is to arrange for the 
utilization of credits by those who believe they can 
utilize them to advantage, and can give assurance 
of repayment. Thus a commercial bank may loan 
not only the credits in which it has property, but 
a proportion of the credits of its depositors, in re- 
turn for interest. An investment bank acts as an 
intermediary between those who have credits they 
desire to place in the way of that utilization which 
may bring interest or profit, and those who desire 
to obtain the right to their utilization. In return 
for its service, the investment bank charges a com- 
mission to one party, or to the other, or to both. 
These services of banks are still designated as 
** supplying money'' or ^* providing money,'' and 
the securing of the right to the utilization of 
credits is colloquially designated as ** getting 
money." The right to the utilization of credits 
that are the property of another may be desired : 

1. By one who has property in sources of sub- 

402 



FUNCTIONS OF A MODERN BANK 403 

stance such as farm, forest, or mine, which he 
believes he can utilize toward the attainment of 
profit, but who has not the credits that would en- 
able him to obtain the equipment and pay the 
wages requisite to that utilization. He may sell 
a proprietary interest in such physical assets, or 
he may borrow the credits, pledging the assets for 
the return of the principal and the payment of the 
interest. 

2. By an organization established in business, 
having property in substance, or in its sources, 
and instruments of production, which desires to in- 
crease these assets, and its volume of production, 
but has not the requisite capital. 

By one who believes there is the opportunity 
for the attainment of profit through the produc- 
tion of certain utilities, but has not the credits that 
would enable him to provide the substance, instru- 
ments of production, or pay the wages essential to 
inaugurating the enterprise. Of such may be one 
who desires to extend the use of a new invention, 
or perhaps one who believes he can find profitable 
market for an increased volume of utilities of a 
kind that are already produced. He may form an 
organization, issuing capital stock, the shares of 
which he sells ; or issuing bonds, which he sells ; or 
both. If he retain little or none of the stocks and 
the bonds, and takes no part in the administration 
of the organization, he is merely a promoter. If 
he has secured as capital the credits essential to 



404 THE FLOW OF VALUE 

the inauguration of production and continues in 
the direction of that production, he is an enter- 
priser, and becomes an employer employing both 
labor and capital. 

3. By a business organization which has sold 
utilities for deferred payment but can not wait 
until payment is made by the purchasers because 
it needs at once to utilize the credits ; or by a busi- 
ness organization which has bought utilities for 
which it can not make immediate payment, or does 
not desire to make payment until they are sold, 
but for which payment the seller is not willing to 
wait. 

4. By one who desires to buy at the current 
prices stocks or bonds for which he believes a 
higher price can be obtained in the future, but who 
has not the credits or does not desire to expend 
the credits requisite to immediate and complete 
payment. 

The supplying of credits to be used as capital 
is not a function of a modern commercial bank. 
The supplying of credit for immediate utilization 
to customers of the third of these classes and of 
the fourth of these classes are two of its important 
functions. 

Many a business organization, believing it can 
obtain profit through the purchase of utilities for 
which it does not make immediate payment, or 
from the sale of utilities for which it does not 
receive immediate payment, resorts to a bank. 



FUNCTIONS OF A MODERN BANK 405 

Thus it is enabled to engage in transactions 
greater in volume and value than would be possi- 
ble if it utilized no more than its own working 
capital. Credits of bank entry, like coin, govern- 
ment notes, or bank notes, are liquid. That is, 
they are value which readily flows in any transmu- 
tation that their possessor may desire to effect. 
Thus they are distinguished from ** fixed capital' ' 
or ** fixed assets," such as sources of substance 
and instruments of production, for which there is 
not always immediate sale, and which may have 
to be sold in their entirety if at all. It is working 
capital that pays for substance, wages, and other 
running expenses, that furthers the flow of utili- 
ties in the channels of commerce. The utilization 
of bank credits facilitates that flow. Let us arrive 
at the significance of this function of a modern 
commercial bank through some consideration of 
its effect. 

Awaiting payment for utilities that have been 
sold is different from awaiting that return upon 
debits incurred in production which can not be 
obtained until the resulting utilities have been 
sold. Payment for utilities subsequent to the 
time of their sale may be designated as deferred 
payment. 

The payment of bills to a retail dealer for cur- 
rent supplies, or of rent to a landlord at the cus- 
tomary intervals of a week or a month, is not to be 
considered deferred payment because there has 



406 THE FLOW OF VALUE 

been that concurrent production and consumption 
of utilities which is balanced at these intervals. 
That is, such payment at intervals no more than 
registers the transfer of credits received in re- 
turn for effort put forth or utilities sold during 
the period in which the indebtedness is incurred. 
The longer the period during which an account 
thus runs, the longer does the payee have to await 
the credits due to him. Therefore, the longer 
does he have to wait until he may utilize those 
credits in the replacement and in the attainment of 
further profit. Payment to retail dealers and 
landlords for final utilities, deferred beyond the 
time at which settlement is due, may have to bo 
met from production subsequent to the period in 
which the utilities were received. This especially 
will be the case with those in adversity who have 
not been able to earn credits to offset their debits. 
Such deferment may be by the procrastinating, or 
by the unscrupulous who do not intend to pay at 
all, or by the thriftless or imprudent who are not 
able to make their intentions good. In the pro- 
portion to which the extension of the period of 
settlement results in **bad debts'' there will bo 
diminished the credits from which dealers can pay 
for, or replenish, their stock. If the proportion 
of bad debts be large, the retail dealer may be 
forced out of business. He may be led to charge 
higher prices than he otherwise would, in order to 
make up from those who pay the deficit of those 



FUNCTIONS OF A MODERN BANK 407 

who do not pay. There are many dealers who 
charge less when payment is immediate than when 
it is deferred. 

There are those without the means to make im- 
mediate payment for final utilities, such as a 
dwelling, a piano, an automobile, who promise de- 
ferred payment in instalments, thus undertaking 
to put forth effort or sell utilities in the future 
that will bring return sufficient to enable them to 
make the payments. This practice with many ex- 
tends to the purchase of furniture and clothing. 
It obviously involves the element of risk to both 
buyer and seller that is absent in case of imme- 
diate payment. The seller may not be willing to 
incur even a temporary deprivation of the credits 
due to him unless the debtor make payment to him 
in addition to the price. Thus the price of utili- 
ties bought on the instalment plan is higher than 
that of utilities for which immediate payment is 
made, because in the higher price is included an 
allowance for interest. Obviously, interest thus 
paid is of a different nature from interest paid 
for the utilization of credits in further production. 
As it adds to the price the purchaser would other- 
wise pay for the final utility, it diminishes the 
amount of his credits available for the purchase 
of other utilities. 

In vastly the greater volume deferred payments 
are availed of by those engaged in the processes 
of production, of buying and selling, in order to 



408 THE FLOW OF VALUE 

facilitate or augment their operations. Such re- 
sort to deferred payments is akin to borrowing. 
When a man responsible for production resorts 
to deferred payments or borrows, he undertakes 
to utilize that for which he has not paid in the 
production of utilities that will enable him to make 
the payment plus the interest. The possibility of 
this attainment lies in the inevitability of a con- 
tinuing demand for utilities, but exactly the vol- 
ume of particular utilities for which there will be 
demand can not be foretold, nor the conditions 
that will affect the prices. To the degree that 
judgment and capacity outweigh the adventurous 
in the man who resorts to deferred payments or 
borrowing, the greater is the probability of his 
obtaining profit; and, conversely, the higher the 
element of the adventurous, the greater is the 
probability of his incurring loss. He who lends, 
or he who accepts promise of deferred payment, 
must place a certain reliance upon the judgment 
and capacity of the debtor, and, therefore, must 
exercise discretion as to the possession df these 
qualities by a man before he becomes his creditor. 
Even though tangible security is ordinarily re- 
quired, he must exercise this discretion. 

As a rule, if the amounts are considerable, de- 
ferred payments or loans will not be accorded ex- 
cept upon the pledge of property by the debtor, 
which will pass into the possession of the creditor 
in case the indebtedness is not paid. Therefore, 



FUNCTIONS OF A MODERN BANK 409 

it is customary for him who undertakes in consid- 
erable amount to make deferred payments or to 
repay a loan, to execute a written promise, which 
not only obligates him to pay the indebtedness 
with interest, but accords the creditor the right to 
take of that in which the debtor has property in 
case the debt is not paid. A written promise may 
accord to the creditor the right to take of any of 
the debtor's property; of such is the ordinary 
promissory note. It may accord the creditor the 
right to take certain specified property; in such 
case a promissory note is accompanied by a mort- 
gage specifying the property pledged. 

As a rule, a promissory note promises deferred 
payment for liquid utilities, or the return of cred- 
its the utilization of which is acquired for a lim- 
ited period. As a rule, a mortgage secures de- 
ferred payments for fixed utilities, or repayment 
of credits, the utilization of which is required for 
a long period. Payment secured by mortgage is 
often in instalments; frequently the interest is 
paid at intervals and the principal at maturity. 

A promissory note may be given, for example, 
by a farmer who does not want to pay for agri- 
cultural implements until he has sold his crop ; by 
a manufacturer who does not want to pay for sub- 
stance until he has transformed it and sold the re- 
sultant utilities ; by a merchant who does not want 
to pay for utilities taken into his stock until he has 
sold them. A third party, however, with credits 



410 THE FLOW OF VALUE 

beyond his desire for utilization may place credit 
at the disposal of the payee in exchange for the 
note, which he will hold until its maturity, making 
a charge for the right accorded the payee to draw 
against the credit in the meantime. The third 
party to whom resort is made for such discounting 
of a promissory note, as a rule, is a commercial 
bank. It places the amount of the note, less the 
discount — the designation of interest paid in ad- 
vance instead of at maturity — to the credit of the 
payee, against which he is entitled to draw the 
same as though he had received immediate pay- 
ment for the utilities and deposited that payment 
to his credit. If he had received immediate pay- 
ment, the credit obtained from the sale of the re- 
sults of past effort would have been paid for the 
results of past effort. "What the bank does is to 
place at his immediate disposal a credit obtained 
by others from the sale of the results of past effort 
which he repays by the credits obtained from the 
sale of the results of effort in the future. 

This function of a bank in essence is the same as 
was the advancing of coin by a money lender in 
the period before the adjustment of transactions 
by bank entries had developed. In large propor- 
tion the credit entries on the books of commercial 
banks to-day arise from deposits of immediate 
payment. As the amount of a discounted note is 
placed to the credit of the payee, credit entries 
also arise in large proportion, often in greater 



FUNCTIONS OF A MODERN BANK 411 

proportion, from the discount of deferred pay- 
ments. 

If the various interrelations between supply and 
demand make it impossible for the drawer of a 
promissory note to obtain prices for the utilities 
he undertakes to sell sufficient to provide the 
credit that will enable him to pay the note and 
the interest, he will, if he can not renew the note, 
finally be obliged to sell other property wherewith 
to make up the deficit. If the demand for such 
utilities increase more rapidly than the supply 
that would otherwise be provided, those who, by 
promise of deferred payment, are enabled to take 
part in increasing the supply, may meet a demand 
that otherwise would not be met. But, if this pro- 
duction, under the promise of future payment, 
leads to such an augmentation in the supply as 
to cause a fall in prices, loss may be incurred by 
part of the producers, or even by all of the pro- 
ducers, of such utilities. That is, this conduct of 
business on what is commonly known as credit will 
have resulted in overproduction. The sale of 
other utilities, in order to meet a promised de- 
ferred payment, means that the results of past 
efforts disposed of for this purpose will not have 
been utilized by their seller in subsequent compen- 
satory production, but will have been utilized to 
make good the deficit of unremunerated produc- 
tion. Thus the drawer of the note sustains loss. 
If he can not pay it or has not property which 



412 THE FLOW OF VALUE 

can be sold for enough to pay it, the payee will 
have to assume the loss. If the payee, in cas'e 
the note has been discounted, can not pay the note, 
or has not property for which sufficient to make 
payment can be obtained, the loss will fall upon 
the bank. Upon whomsoever the loss falls, it 
means that effort has not brought remunerative 
return, and that other results of past effort have 
been utilized to make good the deficit caused by 
effort wasted in unremunerated production. 

It is the impulse to secure gain that leads a 
business organization engaged in production to 
lease, to borrow, to promise deferred payments. 
Such incurring of indebtedness may lead to an 
increase in the volume of production and the va- 
riety of production with benefit to all. Or it may 
so stimulate the volume of production of certain 
utilities with a resultant fall in prices that it will 
force the least efficient out of production. Other 
things equal, these will be those whose costs of 
production were highest. The payment of rent or 
of interest will undoubtedly add to a producer's 
cost, but those who have incurred this obligation 
may be so much more efficient that their costs of 
production will be less than those of other pro- 
ducers who do not pay interest or rent. 

At times of severe competition, when prices 
have become unremunerative, those who do not 
have to pay interest may prefer to discontinue 
production rather than operate at a loss. But 



FUNCTIONS OF A MODERN BANK 413 

those who are under obligation to pay interest 
may feel impelled to continue their operations even 
at a loss, in order to obtain the credits that will 
enable them to pay interest, and thus permit them 
to continue in control of the resources which they 
utilize in production. This is peculiarly the case 
with large corporations, whose promises to make 
deferred payments are in the form of bonds se- 
cured by mortgage, which runs for a long period. 
If at any time there were that inability to pay the 
interest which would result in foreclosure, the 
corporation might lose the right to utilize the 
property pledged. Therefore, it is impelled to 
continue its operations notwithstanding loss, in 
the hope that it will be made good by future profit. 
When a business organization, which has un- 
dertaken to repay a loan or make deferred pay- 
ments for sources of substance and instruments of 
production, has suffered such diminution of re- 
sources that it can not meet or extend its obliga- 
tions, debits incurred by it have not been trans- 
muted into corresponding credits, but the sources 
of substance and instruments of production do 
not pass out of existence. If they have been ac- 
quired under promise of rent which is not paid, 
or under promise of deferred payments which 
are not made, they revert to the owner. If they 
have been purchased with borrowed credits which 
are not repaid, they may be foreclosed, sold, and 
the proceeds paid to the creditor. They may or 



414 THE FLOW OF VALUE 

may not pass into the possession of those with 
the capacity to utilize them for remunerative 
return. 

If a bank were to place an entry to the credit 
of a depositor not based upon utilities sold by him 
or bought by him, the resources of the bank would 
be liable for all checks drawn against that entry 
in case the depositor were unable to obtain equiv- 
alent credit wherewith to repay that advance to 
him. Such an advance to a depositor is discoun- 
tenanced, but it is sometimes effected by the dis- 
count of what is termed an ** accommodation 
note.'' The bank thus lends its credit to the de- 
positor. A bank may be prompted to discount 
an accommodation note in the hope to help to tide 
a depositor in its debt over a period of adversity 
and thus to avoid the loss of that which he had 
previously placed himself under obligation to re- 
pay. In this it may be successful, or in a col- 
loquial phrase it may be ^* throwing good money 
after bad.'' 

Banks, in common with other business organ- 
izations, desire to secure profit. Their profit in a 
great measure is derived from the credits that 
pass to them as interest or discount paid by those 
to whom they lend credit. Therefore, when a 
bank has credits at its disposal in excess of those 
required to meet probable demand upon it for a 
period, it is prone to seek the opportunity to 
place those credits in the way of utilization in 



FUNCTIONS OF A MODERN BANK 415 

return for interest. In so doing it may render 
service toward increasing the production of util- 
ities for which there is compensatory or profitable 
demand, or it may serve to stimulate overproduc- 
tion. The greater the volume of deposits which 
a bank so may utilize, the greater, other things 
equal, will be its profit. Therefore, a bank in or- 
der to enlarge the volume of its deposits may oifer 
to pay interest to its depositors. This gives a 
greater stimulus to the endeavor to keep the de- 
posits loaned at a higher rate of interest in order 
that it may pay the agreed interest to the de- 
positors and have the difference as profit. 

When banks have large accumulations of cred- 
its in the form of deposits, the greater proportion 
of which will likely not be drawn by depositors 
in the near future, they are the more inclined to 
make loans to those who desire to buy stocks 
and bonds than when there are not such accumu- 
lations of deposits. The buyer gives his promis- 
sory note to the bank for that part of the payment 
he does not make from credits in which he has 
property, and deposits the securities bought as 
collateral. That is, he pledges them for the pay- 
ment of the note, and he may at the discretion of 
the bank deposit additional collateral. The prices 
obtainable for the securities so purchased may so 
advance that he may sell them for credits that en- 
able him to pay the loan with interest and yield 
profit. If the prices of the securities fall, the 



416 THE FLOW OF VALUE 

bank may sell them when the decline has reached 
the price that will bring no more credits than 
requisite to pay the loan. There are times when 
the credits advanced by banks on such promis- 
sory notes are in greater amounts than those ad- 
vanced on promissory notes given by manufac- 
turers and merchants to facilitate and augment 
the production and sale of utilities for which they 
are responsible. 

A bank is a factor not only in facilitating, by 
the discounting of promissory notes and similar 
instruments, the continuity of buying and selling 
through periods of time, but it is a factor in fa- 
cilitating the continuity of buying and selling be- 
tween one place and another. The adjustment of 
payments by the balancing of checks against 
checks drawn at various places over wide areas 
by means of branch banks, correspondent banks, 
and clearing houses, contributes to this end. This 
adjustment in the United States is of payments^ 
expressed in terms of the dollar. There are 
many banks, especially in the large cities and at 
the seaports, which facilitate the payment of billsi 
of exchange, acceptances, and similar instrumentsf 
that are drawm in one country but payable in an- 
other, and that may not be expressed in terms of 
the unit of exchange prevailing in the country 
in which they are payable. 

Thus utilities that are sold at prices expressed, 



FUNCTIONS OF A MODERN BANK 417 

in pounds sterling, francs, marks, pesetas, florins, 
or rubles may be accepted by banks of the United 
States and made the basis of credits in dollars; 
and, vice versa, instruments drawn in the United 
States in terms of dollars may be made the basis 
of entry in the banks of another country in terms 
of the unit of exchange there prevailing. This 
means that utilities of a given kind may have a 
ratio to the unit of exchange that prevails in one 
country, and also a ratio to the unit of exchange 
that prevails in another country. Indeed, utili- 
ties of the same kind may have different ratios to 
the same unit of exchange at one place and at 
another place in the same country. To gain an 
understanding of how this may be, it is desirable 
again to resort to outline in the abstract. 

The measure of force required to effect the pro- 
duction of a given volume of utilities of a given 
kind at one place may be different from the meas- 
ure required in its production at another place. 
Obviously, the measure of force required to pro- 
duce a given volume of utilities applied near the 
source of substance would be less, other things 
equal, than that required in their production at 
a place remote from the source of substance, for 
in the latter case the force applied in production 
would include the force applied in transportation. 
Likewise, the force applied at mill or factory, in 
the transformation of substance into a final util- 
ity, has to be supplemented by the force applied 



418 THE FLOW OF VALUE 

in its transportation to the community where it 
is offered for sale, and that applied in placing it 
in the retail store. 

In our hypothetical development of the indus- 
try and commerce of the United States, the emer- 
gence out of self-sufficiency was indicated as of 
one community at one place. Therefore, the meas- 
ures of utilities that were bought and sold for 
the dollar were determined by the interrelations 
between effort applied and wants met at that place. 
If we had supposed that emergence to have been 
of another community in an area better adapted 
to the production of cornmeal, rice, and pork than 
of -flour, potatoes, and mutton, the dollar would 
have arisen from the production and sale of these 
commodities, and not from the production and 
sale of flour, potatoes, and mutton. In the course 
of time, as the further specialization of effort in 
this community led to the accumulation of credits 
in the possession of many of its members, a num- 
ber of them might want flour, mutton, and pota- 
toes as well as cornmeal, rice, and pork. Con- 
versely, in the course of time, members of the com- 
munity producing flour, mutton, and potatoes 
might also want cornmeal, rice, and pork. Obvi- 
ously, the prices of the utilities produced by 
either community would be lower at the place of 
production than at a distant market. Because of 
the differences in the productivity of effort, wages 



FUNCTIONS OF A MODERN BANK 419 

might be higher or lower at one place than at 
the other. 

Prices would, as always, be determined by vari- 
ous interrelations between effort put forth and 
wants met. To those in the one community whose 
effort brought them only subsistence wages, flour, 
potatoes, and mutton would be essential utilities; 
to such in the other would be cornmeal, rice, and 
pork. Foodstuffs of any kind could be obtained 
in greater measure in relation to effort put forth 
at markets contiguous to farms, gardens, orchards, 
and groves than at those farther away. It would 
be so also with utilities of the various kinds that 
are designated as manufactured articles, as the 
extension of specialization and the utilization of 
machinery led to their production. 

Thus there would be the opportunity for trad- 
ers aware of the lower prices for which utilities 
oould be bought at one place, and the higher 
prices which could be obtained for them at an- 
other, to secure profit by buying in one place and 
selling in the other. Extreme examples of such 
contrasts of prices are of those paid for pearls 
to the divers that bring them up from the Indian 
Ocean, and those obtainable in a metropolis of 
the western world; or likewise of the prices paid 
for elephant tusks in the interior of Mozambique 
and those obtainable for ivory. The profit of a 
trader, of course, is all the greater if he can ob- 



420 THE FLOW OF VALUE 

tain in each community that which he sells for 
higher prices in the other. An extreme example 
of this is afforded by the old-time trading to the 
Indians of the Northwest of glass beads and whis- 
key for furs that were sold at great profit in the 
shops of fashionable thoroughfares. 

This buying at one place for lower prices than 
are obtainable at another finds manifestation in 
the buying and selling of utilities of virtually 
every kind. There may be variations in the 
prices obtainable for stocks and bonds in the 
exchanges of New York and those of London, of 
which traders take advantage by giving orders 
to buy or to sell that are transmitted by cable. 

As the facilities for transportation are ex- 
tended and knowledge of prices in various markets 
is diffused, the difference in price between one 
place and another tends to become less, and the 
fluctuations to be less violent. The reason for this 
is that the forces of supply and demand operate 
over a wider area. In a vast area, such as that of 
the United States, throughout which one language 
is spoken, the habits and desires of the population 
tend to a greater similarity, and the equation 
of prices proceeds with greater rapidity than 
among other populations where intelligence is less 
widely diffused and there is a smaller degree of 
effectiveness in production, buying, and selling. 
Thus it is that, in the United States, the adjust- 
ment of transactions is effected by means of 



FUNCTIONS OF A MODERN BANK 421 

checks, drafts, and entries on the books of banks 
from one end of the country to the other with 
but little demand for gold in payment. In coun- 
tries that have not attained this development, coin, 
government notes, and bank notes are still the 
media of exchange in vastly the greater number 
of transactions. 

The acceptance of checks, drafts, bills of ex- 
change, and acceptances depends in part upon the 
facility with which they can be converted into 
liquid credits that can be drawn against, and in 
greater part upon the belief that these instruments 
are certificates that utilities have been sold in 
return for which other utilities are due. Drafts, 
bills of exchange, and acceptances are used in in- 
creasing degree in payment for utilities bought 
in one country and sold in another. Brokers buy 
and sell such instruments drawn in one country, 
and facilitate their being offset against similar 
instruments drawn in another. When a balance 
is due from one country to another it may be in- 
dicated, especially in the case of the more highly 
civilized nations, by credits on the books of banks. 
Through a bank that has branches or correspond- 
ents in various countries, payments in large 
amounts may be thus effected between the buy- 
ers and sellers of these different countries. In 
decreasing degree is there the necessity for the 
shipment of gold from one country to another. 
As there is widening belief in the ** soundness'* 



422 THE FLOW OF VALUE 

of drafts, bills of exchange^ and acceptances, the 
necessity for the use of gold will the further di- 
minish. It has even been suggested that, if all 
of the gold in the world that presumably serves 
as a basis for ** money,'' were impounded on an 
ocean island that was not within the jurisdiction 
of any particular nation but was guarded through 
a concert of the nations, payments between the 
various countries might be effected by transfers 
of debits and credits, just as adjustment between 
the banks of a large city is effected by transfers 
of debits and credits on the books of the clearing 
house, without transfer of the stored currency 
from its vaults. The fact that such a suggestion 
has been made is indication of the- growing, though 
in the minds of many a subconscious, recognition 
that it is property in utilities and not gold that 
is the basis of money. Until there is universal 
belief in the integrity of instruments of exchange, 
there will, however, be a greater or less need for 
gold, especially in the settlement of international 
balances. In any event, there will be a continuing 
need for such media as serve the jjurpose of coin, 
government notes, and bank notes in adjusting 
small and retail transactions. 

The exposition contained in this and the pre- 
ceding chapter makes clear the significance of the 
market quotations on the financial page of a daily 
newspaper. The wholesale prices given for the 



FUNCTIONS OF A MODERN BANK 423 

great staple utilities — wheat, barley, oats, coffee, 
cotton, copper — indicate the concurrence of buy- 
ers and sellers as to the prices at which these 
substances may be purchased for transformation 
into final utilities from which profit can be ob- 
tained. In journals devoted to the interests of 
respective lines of production are given the market 
quotations for substances of the various kinds 
utilized in the respective lines of production. 

The quotations of prices at which the stocks and 
bonds of various business or governmental organ- 
izations have been bought and sold indicate the 
concurrence of buyers and sellers as to the prices 
which buyers believe will advance, or upon which 
they believe they will obtain interest or dividends. 
The quotations of prices for ^* money'' indicate 
the concurrence of buyers and sellers as to the 
rates of interest for the utilization of credits, in 
return for which those who pledge the payment 
of interest believe they can obtain profit. The 
quotations of rates of exchange on money of vari- 
ous foreign nations indicate the premium that will 
have to be paid, or the discount which may be 
availed of, in adjusting payments on international 
transactions. The diffusion of all such quotations 
tends to the equating of supply and demand over 
widening areas. 



XXII 

THE TREND OF THE MONETARY AND BANKING SYSTEM 

If the unit of exchange were considered solely 
to be the respective measures of utilities of differ- 
ent kinds that are exchangeable — that is, the meas- 
ure of a utility of one kind that is exchangeable 
for a measure of a utility of another kind, as de- 
termined by the interrelations between the supply 
of and the demand for utilities — prices for man- 
hours, for want-units, for sources of substance, 
for substance, for intermediate utilities, and for 
instruments of production would be determined 
solely by such interrelations. Prices for respec- 
tive utilities would rise, or prices for respective 
utilities would fall, as there were variations in 
such interrelations. The flow of effort into the 
production of utilities of a given kind, or out of 
the production of utilities of a given kind, would 
be consequent upon a rise in prices or a fall in 
prices so determined. 

As has been indicated in preceding chapters, 
the course of industry and commerce is toward 
such determination of prices. Its progress to that 
end has been retarded and is still retarded by the 
fact that the unit of exchange has been considered 

424 



MONETARY AND BANKING SYSTEM 425 

to be a given quantity of a given metal, usually 
in the form of a coin. It is still almost universally 
held that a given quantity of metal, usually in the 
form of a coin, is the unit of exchange, no matter 
what may be the relation of the supply of coins to 
the interrelations between the supply of and the 
demand for utilities. 

When coins were the sole intermediary of ex- 
change, the measures of utilities that then had 
the ratio of the unit of exchange were determined 
not only by variations in the interrelations be- 
tween the supply of and the demand for these 
utilities, but also by the relation of the supply 
of coins to the volume of utilities that entered into 
exchange. When the supply of coins was large 
in relation to the transactions it was desired to 
effect, prices expressed in dollars — if for example, 
the dollar were the unit by which the coin was 
designated — tended to become higher because 
more dollars were obtained for a given measure 
of a utility, and more dollars were paid for a 
given measure of a utility. Conversely, when the 
supply of coins — for example, designated as dol- 
lars — was small in relation to the transactions it 
was desired to effect, prices expressed in dollars 
would tend to become lower, because fewer of the 
coins designated as dollars were obtainable for 
a given measure of a utility, and fewer of the coins 
designated as dollars were paid for a given meas- 
ure of a utility. Thus arose the theory that vari- 



426 THE FLOW OF VALUE 

ations in prices are due to variations in the supply 
of money in relation to the volume of transactions 
it is desired to effect. Although this is a theory 
of prices it is usually designated as the quantity 
theory of money. 

A vast influx of metals, as new deposits were 
discovered and mined, would lead to a vast in- 
crease in the coinage, with a resulting rise in 
prices as expressed in terms of coin. Then in the 
course of time as the volume of transactions in- 
creased in greater proportion than the increase in 
the coinage, prices as expressed in terms of the 
coin would fall. Such an increase or decrease 
in prices would not effect all utilities simultane- 
ously, but would be more or less gradually diffused 
in its application to utilities of the various kinds. 
Those who watched the rise and fall in the sup- 
ply of money might secure gain because of the 
mutations in its supply. Those not informed as 
to its rise and fall might be caught unawares by 
rising or declining prices. Those who were under 
contracts obligating them to make certain pay- 
ments in terms of the unit of exchange through- 
out a period of time would be obliged, because of 
a decrease in the supply of coin, to sell more of 
utilities in order to make these payments. Or if 
there were an increase in the supply of coin they 
would be enabled to make the payments through 
selling a smaller volume of utilities. Conversely, 
those under contracts entitling them to receive 



MONETARY AND BANKING SYSTEM 427 

certain payments, expressed in terms of the unit 
of exchange, throughout a period of time, would 
sutler loss, in case there was an increase in the 
supply of coin, by having to pay more of the coins 
they received for the utilities they bought. Or 
they would gain, in case there was a decrease in 
the supply of coin, by being enabled to buy greater 
measures of utilities with the payments they re- 
ceived. 

It was so also during the period when govern- 
ment notes and bank notes supplemented the use 
of coins, and currency composed of coins, govern- 
ment notes, and bank notes was the sole interme- 
diary of exchange. Neither governments nor 
banks adjusted their issues of circulating notes 
to the volume of transactions it was desired to 
effect. Governments in adversity were prone to 
issue notes for which they sought to obtain cir- 
culation to the end that they might meet obliga- 
tions in amounts greater than could be paid from 
taxation. Banks were prone to endeavor to se- 
cure a fleeting advantage by the issue of circu- 
lating notes in amounts greater than could be 
absorbed without a rise in prices. The etfect of 
such expansion or contraction in the volume of 
currency was the same as that caused during the 
preceding period by similarly undue expansion 
or contraction in the volume of coin. Such ex- 
pansion or contraction might have an effect upon 
prices that would continue through long periods. 



428 THE FLOW OF VALUE 

The greater the proportion of buying and sell- 
ing that is effected by means of checks, drafts, 
bills of exchange, credit entries and debit en- 
tries on the books of banks, the nearer is the ap- 
proach to the conditions under which the value 
of the dollar is determined by the interrelations 
between the supply of and the demand for utili- 
ties. Thus the less is the degree in which the 
quantity of money theory of prices applies. 
Such an instrument is not issued — that is, is 
not legitimately issued — except in payment for 
utilities bought. When presented at the bank on 
which it is drawn and entered to the debit of the 
drawer, his credit is diminished by the amount 
of the check, and the check is cancelled. That is, 
such an instrument can be drawn only against 
credits obtained from the sale of utilities, and 
its circulation ceases when the transaction is con- 
summated. If payments were so effected in all 
transactions there could not be a circulating me- 
dium exceeding in volume the transactions ef- 
fected, nor of face value exceeding the actual value 
of the transactions. Banks could not discount 
promissory notes except from credits obtained 
from the sale of utilities. Every check, draft, bill 
of exchange, or acceptance would be supported 
by utilities, or by credits derived from the sale 
of utilities. Every credit entry on the books 
of a bank would be a symbol of utilities sold, in 
return for which other utilities could be obtained. 



MONETARY AND BANKING SYSTEM 429 

Then the so-called quantity theory of money, 
the theory that prices depend upon the supply of 
money in relation to the volume of transactions, 
in the sense that money is something separate 
and apart from utilities bought and utilities sold, 
would have no foundation. 

Because, however, of the perpetuation of the 
belief that specie — that is, coin or bullion — ^under- 
lies every exchange, it is held that such an inter- 
mediary of exchange as a check, draft, bill of 
exchange, or acceptance must be redeemable in 
specie if specie is demanded for it. Therefore 
dollars, as expressed even in entries to credit and 
to debit on the books of banks, are not always 
determined absolutely by interrelations between 
the supply of and the demand for utilities that are 
bought and sold. Because of the perpetuation of 
the belief that specie underlies every exchange, 
it is decreed by law that the deposits of a bank — 
that is, all -entries to the credit of its depositors — 
must not exceed a certain ratio to the reserve of 
specie which the bank must hold in order that it 
may have in its possession a sufficient proportion 
of specie to enable it to make, in specie, payments 
for which specie is demanded. Therefore if the 
deposits of the banks have reached the limit of 
the ratio they must bear to the specie reserve, 
and they are unable to increase that reserve, there 
can not be the entry of additional credits to de- 
positors. Thus the discount of promissory notes 



430 THE FLOW OF VALUE 

will have to cease. This will be the case, whether 
or not there is demand for such additional dis- 
counts to facilitate transactions in accordance with 
the supply of and the demand for utilities. In 
such a case it is said that ^^ money is tight.'' The 
banks increase their rate of interest. This tends 
to cause a rise in prides, and thus to restrict the 
volume of transactions. On the other hand, if the 
deposits in the banks are of an amount consider- 
ably below the limit determined by the ratio of 
deposits to reserve, ** money is easy.'' As a con- 
sequence the rate of interest falls, and thus there 
is stimulus to production, buying, and selling be- 
cause of the greater readiness with which prom- 
issory notes can be discounted and credits ob- 
tained. Such retardation and such stimulus may 
or may not be wholesome; it may lead to under- 
production or to overproduction. Such expansion 
or contraction of bank credit is analogous to the 
expansion or contraction in the supply of coins 
during the period when coins were the sole in- 
termediary of exchange, and to the expansion or 
contraction in the volume of bank notes and gov- 
ernment notes during the period when currency 
was the sole intermediary of exchange. 

That the requirement of a ratio of reserve to 
bank deposits is artificial is indicated by the fact 
that there is no rule by which the requisite ratio 
can be determined, and that there is wide differ- 
ence of opinion as to what that ratio ought to be. 



MONETARY AND BANKING SYSTEM 431 

It was in large measure to avoid undue and 
spasmodic contraction and expansion in the means 
by which payment is effected, and thus to ensure 
that the volume of bank deposits might expand 
and contract more nearly in accordance with ex- 
pansion and contraction in the demand for such 
credits as were determined by the supply of 
and the demand for utilities, that the Federal Re- 
serve Banking System was inaugurated. It pro- 
vides that banks which are members of the sys- 
tem may have notes they have discounted, which 
meet certain requirements as to the time of ma- 
turity and other stipulations, rediscounted by a 
federal reserve bank. There is still the prescrip- 
tion of a ratio of deposits to specie reserve, but 
as the specie reserve is concentrated with the 
federal reserve banks there is an increase in the 
ratio of the permissible total of deposits. It 
was the intent that the credits on the books of the 
federal reserve banks have their actual basis in 
utilities in the actual processes of commerce. 

It was also the intent that the government have 
an agency that would enable it to finance its needs 
when under the severe stress of an extraordinary 
emergency. Such an emergency arose during the 
War of 1914. The government incurred indebted- 
ness which it was obliged to liquidate through bor- 
rowing upon certificates issued by the United 
States Treasury in advance of its receipt of reve- 
nue from taxes and from the sale of bonds. 



432 THE FLOW OF VALUE 

Credits received by the government from such 
loan anticipation and tax anticipation certificates 
were deposited in tlie banks. The banks more- 
over were permitted to rediscount with the Fed- 
eral Eeserve Bank notes whicli were secured by 
the *^war paper" of the government, that is by 
obligations of the government based on credits to 
be obtained from taxes, and not upon utilities that 
had been actually bought and sold in the course 
of commerce. Therefore there was a vast in- 
crease in the deposits of the banks, and the vol- 
ume of deposits so increased enabled them to be 
liberal toward their commercial customers. Thus 
these deposits were diffused throughout com- 
merce. 

Taxes and subscriptions to government bonds 
are paid from credits derived from the sale of 
utilities by the citizens. The loan anticipation 
and tax anticipation certificates were virtually a 
forced loan by the government. It is the con- 
sensus of opinion that this increase in the vol- 
ume of credits, not due to the sale of utilities, 
has had an effect upon prices in general anal- 
ogous to that due to a sudden and large in- 
crease in the supply of coins during the period 
when coins were the sole intermediary of ex- 
change, and to a sudden and large increase in 
the issue of government notes or of bank notes 
during the period when currency was the sole 
intermediary of exchange. Therefore the in- 



MONETARY AND BANKING SYSTEM 433 

crease in prices during the war and subsequent to 
the war has been due not only to variations in the 
interrelations between the supply of and the de- 
mand for utilities such as has been indicated on 
pages 224-230, but also to an increase in the vol- 
ume of bank credits not derived from actual 
transactions. 

Changes in the value of the dollar due to a 
deficient or redundant supply of coins, or of cur- 
rency, or of bank credits are not unlike what would 
happen if the points scored during a game were, 
at different phases of its progress, differently 
enumerated. If, for example, certain players of 
the prevailing bridge whist, who kept a continu- 
ous score, were now and then to change clubs from 
6 to 7, diamonds from 7 to 9, hearts from 8 to 10, 
spades from 9 to 12, and to make analogous 
changes in the count of the honors, and varying 
changes were made from one evening to another, 
the continuous score would be vitiated. If vari- 
ations were made in the counts by the same play- 
ers during the same evening, confusion would be 
worse confounded. Attention would be diverted 
from the efficient playing of the game to the grab- 
bing for points, just as the pursuit of what is gen- 
erally considered to be money tends to divert ef- 
fort from efficient application in production to the 
grabbing for dollars. 

Experience of the past indicates that the mone- 
tary system toward which we are tending will pro- 



434 THE FLOW OF VALUE 

vide for a volume of currency that will be sufficient 
for the demand, that will be neither substantially 
less nor substantially greater than the volume re- 
quired for service in the small and retail trans- 
actions which are virtually all in which it is now 
used. The present minor coins of copper, nickel, 
and silver have little relation to the value of gold. 
They are ** token money "and circulate largely 
because of the universality of their acceptance. 
When, for example, there are more dimes than are 
needed, the surplus remains in the mints and in 
the banks until it is absorbed ; when there is a de- 
ficiency, an additional supply is coined. Practice 
has demonstrated that the adjustment of bank 
notes to the actual needs of actual business could 
be attained if a bank were to send a redundant 
supply of such notes received by it to the banks 
of issue where they could be cancelled. This was 
the practice of the Suffolk banking system in New 
England, and it is now the practice of the banks 
of Canada. This is the practice with the five- 
pound notes of the Bank of England. Such a note 
is drawn from a bank by one who desires to pay 
currency for a purchase. It may pass from one 
to another in a succession of transactions, but 
when one who receives it deposits it in a bank, it 
is returned to the Bank of England where it is 
cancelled. 

The evolution of banks and banking indicates 
that we are tending toward a commercial banking 



MONETARY AND BANKING SYSTEM 435 

system under which instruments of exchange such 
as checks, drafts, bills of exchange, and accept- 
ances will be issued only in payment for actual 
transactions, and will be cancelled when presented 
to the bank upon which they are drawn. Under 
such a system banks would not discount promis- 
sory notes other than those given in payment for 
utilities in the actual processes of buying and sell- 
ing, which of course would include stocks and 
bonds. Thus expansion or contraction in the 
volume of bank credits would depend upon ex- 
pansion or contraction in the volume of business. 
The causes for a rise in the price of any utility 
could the more readily be detected, and a rise 
beyond that warranted by an increased demand 
in relation to the supply would the more readily 
be checked. Similarly, the reasons for a fall in 
price could the more readily be detected, and thus 
judgment be formed as to whether it was due to a 
decreasing demand or to overproduction. 

Our present commercial banking system has 
made great progress toward such perfection. The 
end can not be fully attained until there is a 
clear understanding of the actual significance of 
production, buying, and selling, and a profound 
change in the psychological attitude toward the 
metals as the basis of the unit of exchange. 

An inestimable benefit that would flow from the 
attainment of such an ideal would be in the per- 
ception and diffusion among the whole people of 



436 THE FLOW OF VALUE 

belief in the fact that material welfare does not 
depend upon the acquisition of money in the sense 
of endeavoring to obtain as much money as possi- 
ble and to work as little as possible, but that mate- 
rial welfare depends upon the greatest volume of 
production in relation to the effort applied with 
due regard to the relativity of production. 



XXIII 

SOUND MINDS IN SOUND BODIES 

If we accept the dictum of the philosopher that 
the great desideratum of human kind is the at- 
tainment of sound minds in sound bodies, it fol- 
lows that there ought not to be the propagation 
and promotion of the existence of the greatest 
number of persons, but that human effort ought 
to be devoted toward the propagation and the pro- 
motion of the existence of the greatest number 
with sound minds in sound bodies. As the ulti- 
mate purpose of all production of utilities, of all 
buying and selling of utilities, is to minister to 
human wants, it is in order to discuss that minis- 
tration to human wants which conduces to sound 
minds in sound bodies, and that which does not 
so conduce. It is in order to discuss to what 
extent the production, buying, and selling of util- 
ities should be left to individual initiative, and to 
what extent it should be placed under concerted 
regulation to promote this end. If it is found de- 
sirable that there be a degree of concerted regula- 
tion, it is in order to discuss whether it should be 
exerted by the government, or by those engaged 
in production, buying, and selling, or in respective 

437 



438 THE FLOW OF VALUE 

proportions through governmental agencies and 
through those engaged in business. In either 
event, the will of certain portions of the popula- 
tion will b'e imposed upon the will of certain other 
portions of the population. This may be sub- 
mitted to by the people as guidance on the part of 
those competent to guide, or as imposition of the 
nature of tyranny. 

A beneficial utility promotes the attainment of 
the sound mind in the sound body. A deleterious 
utility impairs the mind and the body. A utility 
that is beneficial at one time may be deleterious 
at another, as, for example, food that is palatable 
for dinner may derange digestion if taken at 
breakfast. Or utilities that are beneficial when 
used in moderation may be deleterious in excess. 
Even poison and opiates are not always deleteri- 
ous. Their buying and selling is regulated, not 
prohibited. It is generally admitted that alcohol 
as a beverage is virtually always deleterious, but 
its use in the arts is extended and manifold. Cus- 
tom, example, the diffusion of intelligence, all 
have part in determining the kinds of final utili- 
,ties that are produced, and the proportions in 
which they are consumed. When there is an over- 
whelming preponderance of opinion in favor of 
the prohibition or regulation of the use of utili- 
ties of a given kind, it tends to find expression 
in legal enactment, the effect of which is deter- 
mined through time. 



SOUND MINDS IN SOUND BODIES 439 

There are many who believe that the govern- 
ment ought to extend its activities into the pro- 
duction and selling of many utilities. This, of 
course, would involve the buying by the govern- 
ment of the substances, the payment of the wages, 
and the provision of the instruments requisite to 
that production and sale. It would either have to 
exclude other business organizations from such 
production and selling, or compete with them, or 
decree the prices at which such utilities should be 
sold. If the government were not successful in 
keeping its costs of production within the aggre- 
gate of credits obtained from sales, it would have 
to make up the deficit by taxation. The experi- 
ence of the past has been that whenever a govern- 
ment has engaged in the production of utilities, 
it has seldom, if ever, sought the production of 
the greatest volume in relation to the number of 
persons engaged, but that a political party in 
power has virtually always yielded to the pres- 
sure to give employment to the greatest possible 
number of its adherents. This alone would seem 
sufficient to demonstrate the principle that a po- 
litical entity, having the power of taxation, ought 
not to engage in the production of utilities for 
sale. This includes the converse, that an organ- 
ization engaged in the production of utilities for 
sale ought not to have the power of taxation. 

When a business organization continuously in- 
curs loss, it is forced out of business ; the annihi- 



440 THE FLOW OF VALUE 

lation of credits is concluded by foreclosure. 
When a government continuously incurs loss, there 
is no foreclosure. The loss is a continual bur- 
den upon the whole population. When a business 
organization is suspected of extravagance, mis- 
management, or malpractice of any kind, it can 
be brought to account by process of law or other- 
wise, its affairs and its procedure subjected to 
searching scrutiny. When a government is under 
such suspicion, investigation is only slowly inau- 
gurated. It is often difficult, if not impossible, to 
make the investigation thorough, because a po- 
litical party in power can not be investigated ex- 
cept by its own consent, and, in order to hide its 
delinquencies, is prone to resort to subterfuge 
that baffles penetration. Moreover, no citizen of 
the United States can institute litigation against 
the Federal Government except through the Court 
of Claims, and its decisions are not effective with- 
out the approval of the Congress. 

There are those who believe that the govern- 
ment ought to regulate the price of many utili- 
ties, even though they be produced and sold by 
business organizations. The prescription by the 
government of the price of any given utility would 
have an effect upon the volume in which that 
utility would be produced and sold, therefore a 
certain effect upon the production and sale of 
other utilities, and thus a certain effect upon the 
prices of other utilities. If the government, from 



SOUND MINDS IN SOUND BODIES 441 

time to time, were to ^x a price that would tend to 
adjust the supply of a given utility to the demand 
for that utility, it would be doing no more than is 
accomplished through buying and selling by busi- 
ness organizations. If it were to fix a price lower 
than that which would encourage production, the 
supply would be limited to the volume produced 
by those who could obtain profit at that price, 
with the result that many who might be willing 
to pay a higher price would be deprived. If the 
government were to fix a price higher than that 
which would be determined by buying and selling 
in accordance with supply and demand, it would 
be compelling consumers to pay more than they 
otherwise would. The government would be de- 
termining the proportion of an individual's credit 
which he must expend for utilities at a given time 
if he purchased them in the same volume as be- 
fore. Because of the higher price he might pur- 
chase them in smaller volume, but he would not 
purchase them in greater volume than he might 
himself determine, unless the government com- 
pelled him to do so. 

If the government were to attempt to fix a price 
that would limit the profit of producers, it would 
drive out of production those who could not ob- 
tain profit at the prescribed price. Or the price 
might be such that efficient producers might ob- 
tain a higher profit than otherwise. If the gov- 
ernment were to take by taxation the profit in 



442 THE FLOW OF VALUE 

excess of that prescribed, there would be no en- 
couragement to increased efficiency. There would 
be produced no more than that volume of utilities 
which producers could sell at the prescribed profit, 
because there would be no inducement for an in- 
crease of that volume. 

If the government were to attempt to determine 
both the price and the profit, it also would have to 
determine the costs of production. Therefore, it 
would have to prescribe the rates of wages and the 
prices for substance, and this would involve pre- 
scription of the wages paid for the production of 
substance. If the government undertook to limit 
the profit obtained in the production and sale of 
any given utility, it could not, without extreme 
exercise of authority, compel the continuance in 
its production of those who could obtain higher 
profit in other production. If it were to prescribe 
the wages to be paid in any given line of pro- 
duction, it could not, without an extreme exercise 
of authority, compel wage-earners, who could ob- 
tain higher wages in other production, to work 
for those wages. If it decreed higher wages than 
could be obtained in other production, wage-earn- 
ers would flow into that production. Thus the 
proportion of effort devoted to other production 
might be impaired, with the result that the prices 
of other utilities would advance. Moreover, if 
the government were to undertake to prescribe 
wages, it would either have to adopt arbitrary 



SOUND MINDS IN SOUND BODIES 443 

standards of wages regardless of the efficiency of 
the wage-earners, or else it would have to make 
discrimination between wage-workers of differ- 
ent degrees of efficiency, and this it could not do 
without immediate oversight of the productive 
processes. 

At this time, when human effort is interwoven 
in the production of all utilities, it would inevi- 
tably follow that, if the government were to at- 
tempt to prescribe price and profit in any one line 
of production, the tendency would be toward its 
prescribing price and profit in all lines of produc- 
tion. This would result in determining the pro- 
portions in which effort would be applied in the 
various channels of production, and this would be 
impossible without determination of the propor- 
tions in which utilities of the various kinds would 
be used and consumed. The government would 
be attempting to do that which otherwise is ef- 
fected by interrelations between supply and de- 
mand; by the interworking of human effort in 
producing those things which the producers be- 
lieve will meet the wants of the people, and the 
purchase by the people of the things which meet 
their wants. 

In case of war the situation is entirely different. 
It is then not so much a matter of promoting the 
augmentation of debits and credits, which means 
material prosperity, as it is a matter of preserv- 
ing the conditions under which there may be that 



444 THE FLOW OF VALUE 

augmentation. To this preservation is necessary 
a temporary disturbance in the relations between 
debits and credits. 

In case of war there is at once a disturbance in 
the relations between supply and demand. A large 
proportion of the population engaged in produc- 
tive effort is placed under arms, and a large pro- 
portion of the population remaining is obliged to 
put forth its efforts in the production of arms and 
munitions of war, and of supplies for the soldiers. 
There is left a smaller proportion of the popula- 
tion for the production of final utilities of ordinary 
use and consumption. As the supply of these utili- 
ties falls in relation to the demand, prices rise. 
In time of peace, rising prices for utilities of wide- 
spread demand tend toward an increase in their 
production, and a fall in their prices; but in the 
emergency of war increase in the production of 
such utilities can be effected only by extraordi- 
nary measures, or it may be that it can not be ef- 
fected. As prices rise, it is only those with larger 
credits who can purchase final utilities in the same 
volume as before. If there is a continuing and 
general rise in prices, it will be only those with 
adequate credits who can purchase even the util- 
ities essential to existence. Thus it may be that 
a considerable portion of the population, not only 
of those whose efforts are needed in the immediate 
provision of utilities, but of those whose existence 
contributes to the general welfare, will be sub- 



SOUND MINDS IN SOUND BODIES 445 

jected to privation. The government certainly is 
justified in undertaking that regulation which 
will conduce to the physical and mental efficiency 
of every one whose physical and mental efficiency 
would be maintained in times of peace. It may 
attempt to do this by that prescription of prices 
which will enable those with moderate, or even 
small, resources to maintain their existence. In 
any event, there will be a fall in the supply in 
relation to the wants that must be met. The gov- 
ernment may adopt stringent measures toward 
that increase in production which will augment 
the supply, or it may impose such limitations upon 
purchases that the available production will suffice 
to provide subsistence for the greatest number, or 
it may resort to both expedients. 

The situation is not without analogy to that of 
passengers in a train unexpectedly snowbound in 
a mountain fastness, perhaps beyond hope of 
relief for several days, and for whom the only 
food available were that in an isolated railroad 
eating-house. If the proprietor were to ad- 
vance his prices for sandwiches and coffee in ac- 
cordance with the abnormal demand, the passen- 
gers with plenty of money in their pockets might 
buy the entire stock, and the less fortunate be 
deprived of food. There would then be no possi- 
bility of rising demand stimulating production. 
There would be the problem of maintaining the 
existence of human beings, until they could be 



446 THE FLOW OF VALUE 

brought under the conditions under which there 
would be the normal working of supply and de- 
mand. There is the reflection that the proprietor 
of the eating-house, whose business had suffered 
interference, might be justified in advancing his 
prices to the limit within which there might be 
an equitable apportionment of the available sup- 
ply of food. In case of war, however, the rising 
demand is not accompanied with the cessation of 
production. Production continues by a reduced 
number of persons, but its volume must meet the 
essential wants of the population not under arms, 
and of the population under arms. 

It is a question if the good of the nation would 
not the better be served if the government were 
completely to annul the working of supply and 
demand, in its commercial sense. If to the preser- 
vation of the nation the government drafts men 
to be sent to combat, why should it not place all 
of the able-bodied who remain, under draft in the 
provision of the utilities that must be produced? 
Then could be avoided the extraordinary profit 
reaped by those responsible for the production of 
arms and munitions, and there could be avoided 
the payment of the extraordinary wages to their 
employees with the result that other employees, 
whose efforts are no less effective in promoting 
the welfare of the nation, are placed at a disad- 
vantage. Then perhaps there could be a diminu- 
tion in that drain of taxation from which this high 



SOUND MINDS IN SOUND BODIES 447 

profit and these high wages are paid. This would 
mean a diminution in the issues of bonds whereby 
are obtained the credits from which this high profit 
and these high wages are paid. Then perhaps 
after the war there more readily could be the re- 
sumption of production, of buying and selling at 
prices bearing a due relation to the credits that 
accrued prior to the war, instead of a continua- 
tion of the inflated prices due to the bidding 
against each other of those whose wants must in 
any event be met. 

In time of peace when production, buying, and 
selling are adjusted by supply and demand, the 
fundamental principle of bargaining, that in an 
exchange a man will obtain the most he can for 
that with which he parts, and will yield as little 
as he can for that which he obtains, leads in the 
long run to each person securing that which he 
wants at the lowest obtainable price — that is, to 
the buying and selling of the greatest measures 
of utilities for the dollar — which will encourage 
the production of that supply for which there is 
a compensatory demand. It may be demonstrated 
that the adjustment thus effected leads in the long 
run to the greatest benefit to all, to the greatest 
development of sound minds in sound bodies. 

It would seem to go without saying that as a 
rule the greater the supply of utilities of the kinds 
that meet his wants which an individual can obtain 



448 THE FLOW OF VALUE 

in return for the credit that has accrued to him, 
the better will he be enabled to maintain himself 
and those dependent upon him in a condition of 
mental and physical efficiency. Therefore, the 
greater the volume of utilities that contribute to 
mental and physical efficiency that are produced 
in relation to the population, the greater will be 
the proportion for each person. This means that 
each utility must be produced in the volume for 
which there is demand with the efforts of the few- 
est persons continuously capable of that produc- 
tion. This means that the prices of utilities in 
relation to the effort applied in their production 
will be low; that is, that for a given measure of 
human effort can be obtained the greatest meas- 
ures of utilities. 

It is to the advantage of the entire population 
that utilities be obtainable at the lowest prices 
that will encourage their adequate production. 
This means that wages must be the lowest that 
can be paid in relation to the volume of produc- 
tion. If higher wages be paid, there is a smaller 
volume of production in relation to the wage, and 
there is the expenditure of credits that could be 
otherwise utilized. But if higher wages be paid 
for more effective effort, 'there is greater efficiency 
of production in relation to the effort applied. 
As substance, intermediate utilities, instruments 
of production, and final utilities are the results 
of the application of effort, it follows that the 



SOUND MINDS IN SOUND BODIES 449 

prices of all of these utilities must be the lowest 
that will elicit their adequate production. If 
higher prices be paid for any utility than requisite 
to this end, there is expenditure that could have 
been utilized in other production. 

The working of supply and demand does not 
mean that there should be no restriction upon 
production, upon buying and selling. The very 
expression implies that there must be the restric- 
tion of production to the volume which meets de- 
mand. Unrestricted production, buying, and sell- 
ing leads at times to overproduction. 

Production in excess of that for which compen- 
satory prices can be obtained means that all en- 
gaged in that production will not receive the utili- 
ties that will enable them so to continue. A cer- 
tain number, perhaps, can find employment in 
other production, but if overproduction is wide- 
spread, affecting many kinds of utilities, there 
may ensue widespread unemployment. This con- 
dition has frequently resulted from the produc- 
tion of utilities of a given kind by many different 
producers in ignorance of the total volume that 
would be forthcoming from all of them, and who 
have not made an approximately accurate esti- 
mate of what the market would absorb at compen- 
satory prices. In the exceptional case of utilities 
that are produced only upon definite orders, there 
can not be such overproduction. But v/hen there 
is widespread overproduction of utilities causing 



450 THE FLOW OF VALUE 

widespread unemployment, there is falling demand 
for all kinds of utilities. Hence there is a dimin- 
ishing utilization of the instruments used in pro- 
duction, and consequent lack of employment. In 
the case of nonperishable utilities, the overproduc- 
tion may be absorbed in the course of time, but in 
the meantime there is idleness of instruments, and 
unemployment of wage-earners. In the case of 
perishable utilities, such as many of the foodstuffs, 
there is notable waste, and the effort devoted to 
the excess of production has been wasted. 

Those responsible for the processes of produc- 
tion have sought to prevent overproduction 
through coordination for the purpose of limiting 
production to the requirements of the market, and 
of directing utilities that have been produced to 
the markets where they can be sold at compensa- 
tory prices. For example, a committee of whole- 
sale dealers in butter meets each day in the city 
of New York. To it are presented statements of 
the quantity of butter in stock in the city. It esti- 
mates the further quantity that will be required 
for consumption during the immediately succeed- 
ing days, and determines the price which it be- 
lieves will cause that supply to be forthcoming, 
fixing a somewhat higher price if the supply on 
hand is scant than if it is abundant. This price 
is telegraphed to the producers of butter through- 
out the region whence comes the supply for the 
vast community of which Manhattan is the heart. 



SOUND MINDS IN SOUND BODIES 451 

By thus adjusting the shipment of butter to New 
York, this committee parallels in methods and re- 
sults what the governors of the Bank of England 
do in adjusting the flow of gold into and out of 
England by fixing the rates of discount. In many 
parts of the country, vegetable and fruit growers 
who had been consigning their products to differ- 
ent markets more or less at a venture, with the 
result that there was often a glut in one market 
and a paucity in another, have formed associations 
by means of which the supply in respective mar- 
kets is more closely adjusted to the demand. 

Conspicuous among the attempts to prevent 
overproduction have been the measures taken by 
manufacturers. First there were agreements to 
maintain prices, then trusts, then the amalgama- 
tion of different organizations into one corpora- 
tion, then agreements between corporations, then 
the holding company, and finally the merger and 
amalgamation of separate corporations into one 
great corporation. This tendency awakened pop- 
ular antagonism, because of the fear that there 
would be the stifling of competition, and inordi- 
nately high prices. This fear in many cases for 
a time was realized. Obviously, when a large 
corporation raises the prices of its products, many 
who would purchase at lower prices are deprived 
of them. But when there is extraordinary profit, 
competition is certain to be engendered soon or 
late. Obviously, the development of the great- 



452 THE FLOW OF VALUE 

est number of sound minds in sound bodies means 
that there should be the least possible deprivation 
because of that unemployment which leaves a 
wage-worker without means wherewith to pur- 
chase the utilities he needs, and also the least pos- 
sible degree of deprivation because of prices 
higher than are requisite to allow profit to the 
least efficient producer for whose product there 
is demand. 

When a business organization, or an association 
of business organizations, so controls the produc- 
tion of utilities of a given kind for which there 
is continuing demand which must be met, that it 
is enabled to fix prices without fear of competi- 
tion, it has a monopoly. Thus it may so fix the 
price as to obtain extraordinary profit. The ques- 
tion arises whether it is better for the government 
to attempt to remedy this condition by prescrib- 
ing prices, or by compelling the monopolistic 
prices to be brought into the light which will dis- 
close injustice, if injustice has been done. 

Quite as conspicuous as the combination of those 
responsible for the production of utilities are the 
combinations of those who put forth effort for 
wage, known as trade unions. By concerted ac- 
tion, trade unions have at times secured higher 
wages for their members than otherwise would 
have been possible, wages oftentimes higher than 
those for which other employees of the same de- 
gree of efficiency could have been secured. 



SOUND MINDS IN SOUND BODIES 453 

The evolution toward larger and more complex 
organizations has woven the individual into a 
web that causes the unrestrained application of 
the previously accepted principle of competition 
to be injurious. In the earlier stages of industry 
and commerce, an individual could buy or could 
sell at any given price, or he could refuse to buy 
or to sell. He could work for any given wage, or 
he could refuse to work for wage. His decision 
redounded to his benefit or to his injury, and per- 
haps to the benefit or to the injury of those de- 
pendent upon him, but as a rule had little effect 
upon others. But at this tinae when the price of 
a given utility has an effect in determining the 
prices of other utilities, when the price limits the 
wage that can be paid to those engaged in pro- 
duction ; when the wage paid in the production of 
a given utility has an effect in determining the 
wages paid in the production of other utilities; 
when wage and price have an effect in determin- 
ing profit ; and when the profit obtained from the 
production of a given utility has an effect upon 
the profit obtained from other production and 
upon the volume of future production, the price 
of any utility of general need may have a far- 
reaching effect upon the promotion of sound 
minds in sound bodies. 

In less degree are prices and wages determined 
by isolated bargaining between buyer and seller, 
and employer and employee. They are now in- 



454 THE FLOW OF VALUE 

fluenced by many factors. Again the question 
rises as to whether the determination can be bet- 
ter effected by those engaged in buying and sell- 
ing, or whether there shall be resort to other 
agencies, or whether the government shall under- 
take the determination. 

Unrestrained competition means that each party 
to a bargain endeavors to obtain all that he can. 
Seldom is the effect upon others considered; sel- 
dom is consideration given to the effect upon the 
continuity of production, of buying and selling, 
upon employment and unemployment, upon the 
general welfare. In a higher state of enlighten- 
ment, the effect upon others must be considered. 
If those responsible for the processes of produc- 
tion, of buying and selling, and if those who work 
for wage always acted in the light of the widest in- 
formation and in a spirit of the highest enlighten- 
ment, it is clear that industrial conflicts would 
diminish. 

The evolution of industry and commerce is un- 
mistakably toward the production, buying, and 
selling of the utilities of general use and consump- 
tion by great corporations, and to an increasing 
concord of action between the corporations en- 
gaged in the same line of industry. An adminis- 
trative and executive board constituted of men 
of proved integrity, of large experience, and broad 
grasp can obtain the widest information from time 
to time as to the probable demand for the prod- 



SOUND MINDS IN SOUND BODIES 455 

ucts with which it is concerned, and, therefore, 
can make the provisions thatt will most closely 
approximate that demand. As there is an ever 
closer interweaving of all the processes of in- 
dustry and commerce, it would follow that an 
administrative board, composed of representa- 
tives of the boards administering each great divi- 
sion of industry and commerce, could maintain 
that relativity between the production of sub- 
stances of the different kinds, their transforma- 
tion, and the proportions in which final utilities 
would be produced, the provision of instruments 
of production, of means for transportation, and 
that utilization of the credits which came to the 
various organizations, that w«ould result in a mini- 
muna of overproduction or of underproduction. 

Even though the farmer has less control over 
the cosmic force that is a principal factor in his 
production, than have those who transport and 
transform substance over the cosmic force they 
apply, and though he, therefore, is less able to 
forecast the volume of production that will follow 
a given expenditure, the volume of the crops of 
the respective kinds could be far more closely ad- 
justed to demand if there were greater coordina- 
tion in their planting and conservation. It has 
been stated by high agricultural authority that the 
will of man has more effect upon the volume of 
agricultural production than the weather. He can 
sow in prepared soil selected seed from which 



4^56 THE FLOW OF VALUE 

will spring the stronger plants that in consider- 
able degree resist inclement changes in the 
weather, and he can protect them from weeds and 
parasites. He can breed animals from selected 
strains and protect them from vicissitudes. If in 
agriculture were sought the attainment of the 
greatest production in relation to the number of 
persons whose efforts are applied, those engaged 
in the production would not be so near the margin 
of deprivation when the yield fell short of expec- 
tations. Thus would the needs of the whole peo- 
ple be better served. 

By means of developed statistical and account- 
ing systems adapted to the respective phases of 
production, of buying, and selling there could be 
gaged the efficiency of each person, the efficacy 
of every instrument, and thus there could be ob- 
tained the maximum of production in relation to 
the effort of each person with due allowance for 
rest, recreation, and self-development. Through 
explicit and comprehensive reports, the status and 
achievement of each organization could be placed 
before every person with the intelligence to under- 
stand them. 

The maintenance of a due relativity between all 
the processes of industry and commerce would 
mean a minimum of unemployment. Inasmuch 
as every person capable of putting forth effort 
in production has the capacity for making contri- 
bution toward meeting the wants of others, and 



SOUND MINDS IN SOUND BODIES 457 

has the capacity for consuming utilities produced 
by the efforts of others, it would seem contrary 
to the nature of things that there should not be a 
place in the industrial and commercial organiza- 
tion for every such person. If there were ade- 
quate adjustment of the putting forth of effort in 
the meeting of wants, there would never be a con- 
siderable number of the employable without em- 
ployment. If the production of utilities were, as 
a rule, to increase in relation to the number of 
those engaged in their production, it would seem 
that every capable person ought to be able to 
obtain the utilities requisite to the support not 
only of himself but of his family. 

It is a common saying that capital is accumu- 
lated by saving. From this it can not, however, 
be deduced that a man should save no matter how 
little he receives. If a man can earn no more 
than sufficient to maintain the physical and mental 
efficiency of himself and his family, is he justified 
in impairing that physical and mental efficiency 
in the endeavor to accumulate business capital? 
This query does not include investment in insur- 
ance, which every one who is without other re- 
course ought to make against the privation that 
otherwise would be caused by illness, accident, un- 
employment, superannuation, and death. Such 
investment is of the nature of business capital, for 
it is so utilized by the insurance company. Phys- 



458 THE FLOW OF VALUE 

ical efficiency does not suffer because of a certain 
degree of frugality of living, and mental efficiency 
may be promoted by a degree of frugality of liv- 
ing. It is not to be assumed that this is to be car- 
ried to an extreme. If all persons lived with the 
utmost frugality with which physical efficiency 
could be -maintained, would not the peoples of 
civilization be without many of the utilities which 
minister to the fullness of life? To the highest 
development are there not requisite the refine- 
ments of dwelling, utilities that minister to the 
mind and the soul as well as the body? The less a 
man expends for individual use and consumption 
of that which he receives, the more he will have for 
investment toward the attainment of further cred- 
its. If he elect to live in miserly squalor, credits 
may roll up to his account, but the chances are that 
the quality of his individual effort will be im- 
paired, and certainly his life will be narrow. 

All that is, is in eternal motion. Motion is ac- 
tivity: activity is the manifestation of force. As 
there can not be the manifestation of force with- 
out effect, there is the continual flow of cause and 
effect. The working of eternal force is manifested 
in the forms of existence. As animate existence 
has evolved, there has evolved consciousness. 
Out of consciousness has evolved intelligence. 
The highest type of all the forms of existence 
known to man, is man himself. His body is 



SOUND MINDS IN SOUND BODIES 459 

adapted to serve more varied purposes than that 
of any other living creature. His intelligence en- 
ables him to make all that is in his environment 
serve farther reaching purpose than does that of 
any other living creature. 

There is activity within the human body, awake 
or asleep, in sickness or in health, from birth un- 
til death. The human mind is consciously active 
during the waking hours. The conscious activity 
of the mind directs the voluntary activity of the 
body. The mind decrees the purpose the body 
shall serve, and how it shall serve it. Therefore, 
the mind must know the purpose to be served, and 
how it must be served. 

If more is used than is necessary to serve a 
purpose, there has been waste, in that the super- 
fluous could have been applied to serve another 
purpose. If less is used than is required, there 
has been waste, because the purpose has not been 
fully served. The first principle of architecture 
is that a building shall be of the utmost adapta- 
bility for the purpose it is designed to serve. 
Without this, there can be neither beauty nor ele- 
gance. With this, the construction may be given 
all of the grace and symmetry the service of the 
purpose will permit. The structure may be given 
the decoration that promotes beauty, but there 
may be no construction for decoration alone be- 
cause that would not aid in serving the purpose. 
It would be superfluous, and superfluity is ugliness. 



460 THE FLOW OF VALUE 

Ought not this principle to govern all of the 
activity of man? Ought not food be consumed in 
the measure that best serves the efficiency of body 
and brain ? Ought not clothing be that which best 
protects the body and allows the fullest play of 
the bodily organs? Then there may be given to 
the service of food all that furthers the beauty of 
the service, and to the fashioning of clothing all 
that furthers elegance. Ought not this principle 
to govern all that is within the habitation? 

Ought not this principle to have application 
throughout the processes of industry and com- 
merce, all of production, buying and selling? The 
application of the superfluous enlists effort that 
might have been applied in the production of that 
which serves. If all of the effort exerted in pro- 
duction were applied in due relativity, there would 
be neither superfluity nor insufficiency in the ap- 
plication of force in the production of utilities of 
any kind. If there were no demand for other 
than beneficial utilities, there would be no appli- 
cation of force in the production of deleterious 
utilities. If all of the force available in produc- 
tion were applied by the sound mind in the sound 
body, there would be an abundance of all things 
that would serve the needs of every person, ample 
for the support and training of the generation that 
is coming, for the care and comfort of the genera- 
tion that is passing. 

Then the relation of the activities of each per- 



SOUND MINDS IN SOUND BODIES 461 

son to the activities of all other persons from the 
standpoint of the production, the buying and sell- 
ing of utilities, would still be indicated by dollars. 
The abundance for every one of all that dollars 
mean would cause no diminution in the impor- 
tance of the activities that give rise to debits and 
credits expressed in dollars. A greater impor- 
tance would attach to the activities that promote 
the beauty and fullness of living. The captain 
of industry, the great merchant, the great banker, 
would be esteemed not alone because of the vol- 
ume of the debits and credits for which they were 
responsible, but also because of the contribution 
to the benefit of their fellowmen which gave rise 
to that volume of debits and credits. Approval 
or censure would be meted unto them because of 
the manner of their expenditure, and the manner 
of their lives. They would be esteemed for their 
achievement as the scientist, the philosopher, the 
teacher — he who adds to the sum of human knowl- 
edge and the diffusion of intelligence — is es- 
teemed. 

To the utmost development of the mind and cul- 
tivation of all that makes life worth living is neces- 
sary no great accumulation of final utilities of 
personal gratification. They may burden rather 
than serve. It is a lasting reassurance and com- 
fort to reflect that greater sources of satisfaction 
lie in the wholesome exercise of the physical and 
mental faculties, in the domestic affections, the 



462 THE FLOW OF VALUE 

goodwill of friends, and the esteem of the com- 
munity. These could be attained by every person, 
did every person strive to bring about the con- 
ditions conducive to their attainment. 



THE END 



INDEX 



Acceptances, 416 f. 

Accounting systems, 456. See 
also Bookkeeping. 

Accounts, necessity of, in fami- 
lies, 265. 

Actors, 214. 

Allies: relation of, to produc- 
tion in United States, 224; 
227. 

Appliances, 124. 

Artisan: 22; evolution of, 37; 
development of prices of, 
products, 64-83. 

Asia, 8. 

Atom, 268. 

Automobiles, 225. 

Availability, value of, in real 
estate, 127 f. 



B 



Bank credit: 43, 47; defined, 
44. See Money, Credit. 

Bank loans, 407 ff. 

Bank notes : functions of, 42 f . ; 
transmutation of property 
into, 44; 235; as money, 
387 f . See also Notes. 

Bank system, trend of modern, 
424-435. 

Bank of England, methods of 
adjusting flow of gold, 450 f. 

Banks: evolution of, 387 f; in- 
terrelation of, 389 ff. ; effect 
of, upon transactions, 390 f . ; 
functions of modern, 402- 



423; present tendency of, 
434 1 

Bargaining: evolution of, 
35 ff. ; mediaeval, 37 f . ; ten- 
dency of, 158 f.; benefits of, 
220 f. 

Bills of exchange, functions of, 
48 f. 

Bodies, dependence of sound 
minds upon sound, 437-462. 

Bonds: investment in, 183 ff.; 
government, explained, 228 ; 
variation in value of, 420. 

Bookkeeping : evolution of, 
253 ff. 

Bullion, 387. 

Business : primitive, 35 ; medi- 
aeval, 37 f. See also Trade, 
Commerce, Transactions. 

Business capital, defined, 259 f . 
See Capital. 



C 



Caisse, mediaeval, 387. 

Capacity: 244; bodily and men- 
tal, standard of greatness, 

" 459 f. 

Capital: discussion of, 252- 
265; defined, 259; human ef- 
fort as, 260 ff. ; investment 
of, 260 f . ; sources of, 260 ff. ; 
necessity for augmentation 
of, 260 f . ; application of cos- 
mic force to, 263 f . ; distinc- 
tion between, and labor, 314- 
318; business, 457. 

Carpets, 163. 



463 



464 



INDEX 



Cause: sequence of, and effect, 
15. 

Cellulose, 24. 

Census bureau, 25. 

Charity, 81. 

Checks : 42 f. ; uses of, 38^ ii. 
See Drafts. 

Chest: mediseval, first bank, 
.387. 

Chicago, 9. 

China, unit of exchange in, 41. 

Chlorophyll, 24. 

Civilization: effect of, upon 
human wants, 4 ff. ; influence 
of, upon artistic develop- 
ment, 17; dependence of, 
upon profit, 200 ff . 

Clearing house, development of, 
391. 

Clothes: transformation of raw 
material into, 6; 87; produc- 
tion of, 191; 202. 

Coin: 29 ff.; 235; unit, 378. 
See also Currency, Money, 
Unit of Exchange. 

Collectors, art: effect of, on 
profit, 129. 

Colonial period, exchange dur- 
ing, 53 ff. 

Commerce: development of, in 
United States, 136-141; 
growth of international, 
141 f.; significance of dollar 
in development of, 375 f.; evo- 
lution of, 452 f . ; possible ad- 
ministration of, 454. See 
also Barter, Trade, Ex- 
change. 

Compensation: law of, defined, 
18 ff. 

Competition: evolution of, 
36 f.; tendency of, 187; ef- 
fect of, upon business devel- 
opment, 187. See also Bar- 
gaining. 

Congress: in relation to Court 



of Claims, 440. See United 
States, Government, Federal 
Government. 
Coordination: of human effort, 
84-113; profit due to, of 
human effort, 93-113; of em- 
ployer and employee, 200 ff. 
Correlation of human effort 

and human wants, 143-153. 
Corporations: 183 ff., 451, 452; 
development of, dependent 
upon competition, 187 ; duty 
of, to employees, 206 f . ; 
sources of capital of, 261 ff. 
Cosmic force: relation of, to 
matter, 6 ff . ; application of, 
16 f.; by machinery, 114- 
135; relation of, to indus- 
trial development, 142 f.; in 
oil production, 157 f ; meas- 
urement of, 270; control of, 
455 ff. 
Cotton : 225 ; transformation 

of, into clothing, 6. 
Court of Claims: jurisdiction 
of, in proceedings by a citi- 
zen against United States, 
440. 
Craftsman, evolution of, 37. 
Credit: defined, 44 f., 45; effect 
of value fluctuation upon, 
169 f.; government, how ob- 
tained, 228 ff. See also 
Coin, Money, Bank Notes, 
Bank Credit. 
Credits: flow of, 130 ff., 213- 
231; accumulation of, 181; 
availability of, 198 ff.; 235; 
accumulated, due to produc- 
tion, 323 f . ; in return for 
man-hours, 338-345 ; reten- 
tion of, 364-368; 458. 
Crops: 193; "futures" on, 

246 f. 
Currency: defined, 43; full 
meaning of, 388 ff. See also 



INDEX 



465 



Bank notes, Gold, Bullion, 
Silver. 



D 



Debits: flow of, 130 ff.; 213- 
231. 

Debt, defined, 45. 

Deficit, causes of, 411 f. 

Definitions, explanation of, 22- 
33. 

Demand: defined, 35; increase 
of, 36 ff. ; effect of increase 
of population on, 82; effect 
of, on profit, 130 ff.; flow of, 
142; effect of World War on, 
224 ff . ; interrelation between 
supply and, as regards 
money, 392 ff. ; relation of to 
wages, 443. See Want. 

Depression, effect of business, 
upon profit, 374 f. 

Desires: primitive, 34 f. 

Dividends, 182. 

Dollar: nexus of exchange ra- 
tios, 49; variation of pur- 
chasing power of, 365-376. 
See also Unit of Exchange, 
Money, Coin. 

Draft : function of, 42 f . 

Dwellings : material entering 
into, 6 f.; 235. 



E 



Education, effect of upon labor, 
205 f. 

"Effectiveness," distinction be- 
tween, and efficiency, 298 f. 

Effort: 34; interrelations of, 
prices, and profit, 188-212. 
See Human Effort. 

Efl&ciency: effect of, upon 
credit, 81 f.; in relation to 
profit, 85 f . ; necessity of, to 



profit, 132 ff.; wage-stand- 
ard, 147 f.; defined, 197; 
distinction between, and "ef- 
fectiveness," 298 f . ; 442 ; ef- 
fect of saving upon, 457 f. 

Electricity, 16. 

Electrons, 268. 

Employment, 79, 96-113, 132, 
135, 210, 453. See Labor. 

Employee: as economic utility, 
79 f . ; regulation of wage of, 
96-113; dependence of profit 
upon, 135. See also Artisan, 
Labor, Wage-earners. 

Employer: relation of, to prod- 
ucts of artisans, 64 ff . ; in re- 
lation to pricea and profit, 
96-113; relation of to eco- 
nomic development, 114 ff.; 
direction of coordination by, 
132 ff.; duty of, to em- 
ployees, 206 f . ; as wage- 
earners, 210; as effecting 
prices, 453 f . 

Environment: effect of upon 
judgment, 3 ff. ; man's reac- 
tion upon, 13 f.; influence of, 
upon human effort, 166 f; 
225, 230. 

Equipment, 225, 230. 

Europe, 8. 

Exchange: defined, 18; of util- 
ities, 33 ff. ; evolution of, 
35 ff . ; attitude of humanity 
toward, 36 ff. ; mediaeval, 
37 ff.; relativity, 40 f.; 
money as medium of, 41 ff.; 
barter as first form of, 58; 
ratio, 47 ff., 53 ff. ; evolution 
of the artisan in relation to, 
64-83; results of increase in, 
141 f.; by individuals, 286- 
299; true significance of, 
ratio, 345-352; relation be- 
tween money and, 278 ff.; 
unit of, 34-51, 379 ff.; ac- 



466 



INDEX 



tual development of, mechan- 
ism, 380 ff. 
Existence, dependence of, upon 
human effort, 11 ff. See Hu- 
man Effort. 



F 



Fabrics, processes in produc- 
tion of, 157. 

Factories, 137, 235. See Arti- 
san, Labor, Employee. 

Family: condition of, under 
modern civilization, 4 f , ; evo- 
lution of, 34 f.; 37; in the 
American colonies, 53 f.; ef- 
fect of, upon evolution of 
artisan, 72 ff . ; relation be- 
tvv^een, and production, 82 f . ; 
effect of, demands upon rela- 
tivity of prices, 159 ff.; ne- 
cessity of keeping, accounts, 
265; 457 f. 

Farms: 4; as examples of 
transformation of matter 
and transmutation of force, 
24 ff. ; confusion of census 
bureau as to what constitute, 
25; 124, 125, 202; value of, 
in United States, 247; 281. 

Farmer, comparative control 
of, over cosmic force, 455 f . 
See Farms. 

Federal Government. See Gov- 
ernment, United States. 

Fees, 338. 

Flow of debits and credits, 
130 ff., 213-231. 

Fluctuation in money and de- 
mand price, 160 ff. See De- 
mand, Wants, Value, Money, 
Prices. 

Food: tribal attitude toward, 
34 f . ; a primal necessity, 36, 
37; first of utilities, 202 f.; 



prices of, governed by de- 
mand and supply, 449 ff. 

Foodstuffs: hypothetical devel- 
opment of, prices, 52-63; 
first factor in evolution of 
exchange, 64; 87; effect of 
manufacturers on production 
of, 163 ff. 

Force: in relation to human 
effort, 6 f . ; application of, to 
substance, 10 f.; value of, 
11-17; as property, 20 ff.; 
property in, defined, 22 ff. ; 
kinds of, 26 ff. ; manifesta- 
tions of, 458 ff. See also 
Cosmic Force. 

Force-unit, exemplified, 166 ff. 

Force-utility-unit : defined, 272 
ff. ; relation of, to want-util- 
ity-unit, 273 ff.; 277. 

Forests, 125, 235. 

Furnaces: relation of, to in- 
dustrial development, 138. 



G 



Gold: use of, in exchange, 379; 
Bank of England method of 
adjustment of, flow, 450 f. 

Government: in relation to 
regulation of production, 
437 ff. See United States. 

Government notes, 235. 

Government regulation of utili- 
ties, 439. 

Governmental grants, 243. 

Great Britain, unit of exchange 
in, 41. 

Grain, 225. 

H 

Homes: a primal need, 4; ma- 
terial for, 6; value of, 235. 

Horses, 226. 

Houses, 235. See Dwellings, 
Homes. 



INDEX 



467 



Human effort: and human 
wants, 3-17; application of, 
5f. ; cosmic force in relation 
to, 6 f . ; part played by, in 
combining substances, 6 IT. ; 
dependence of existence upon, 
11 ff.; application of, to 
property rights, 19 f . ; rela- 
tion of, to exchange, 34 ff . ; 
evolution of, as an economic 
utility, 72-83; relation of, to 
prices, 51 ff.; expenditure of, 
in making modern machines, 
89 f.; 94; development of 
coordination of, 96 ff., 132; 
relation of, to profits, 131; 
relativity of, and human 
wants, 143-153 ; interrela- 
tions of, prices, and profit, 
188-212; expression of rela- 
tion between, and wants, 
267; direction of, in relation 
to propagation, 437. 



Immigration: effect of, upon 
commercial and industrial 
life in United States, 137. 

Individuals : in commerce, 286- 
299. 

Industry: development of, in 
United States, 136-142; fun- 
damental factors of, 144 ff.; 
effect of competition upon, 
187; value of dollar in devel- 
opment of, 375 f.; evolution 
of modern, 452 f . 

Instruments of production, 235. 
See Factories, Machines, 
Warehouses, Tools. 

Insurance: mitigating effect of, 
223 ; as an investment, 457 f , 

Intelligence: in relation to hu- 
man effort, 5 f . ; primitive. 



36 f . ; remedial effect of, 222. 
See also Mind. 

Interest: as a factor in com- 
merce, 134 f.; basic principle 
of, 215 f.; 223; living upon, 
335-338; evolution of, 386 ff. 

Invention ; relation between, 
and industrial development, 
137 ff. 



Journeyman. See Wage-earn- 
ers. 

Judgment: effect of environ- 
ment upon, 3 ff. ; application 
of, to profit, 133 f. 



K 



Kilowatt-hour, 29. 



Labor: evolution of skilled, 
64-83 ; development of, 
wages, 77 ff.; wages of 
skilled, 93-113; unskilled, 
204 f . ; effect of World War 
upon, 225 f.; distinction be- 
tween capital and, 314-318. 

Land: as a source of substance, 
84 ff. ; ratio of, to dollar, 87 ; 
flow of value from, 124 f . ; 
determination of, value, 
126 .f. ; causes of increase in 
value of, 127 ff.; effect of, 
upon economic change, 136; 
235; utilization of, to meet 
wants, 245 f . See also Real 
Estate. 

Law: development of, of prop- 
erty, 18. 

Life: dependence of civilized, 
upon exchange, 34 ff. 

Life insurance, as an invest- 
ment, 223, 457 f . 



463 



INDEX 



Loan system: evolution of, 

386 ff.' 
London, 420. 



M 



Machinery: effect of, upon em- 
ployment, 90, 9L 
IVlachines: 124; effect of, upon 
prices and profit, 114-135; 
in relation to industrial de- 
velopment in United States, 
138 f.; 163, 235. See Instru- 
ments of Production. 

Man from Mars: viewpoint of, 
3; fitness of, to judge of 
earthly affairs, 4f.; conclu- 
sions of, 11 f. 

Man: physical development of, 
compared with mental, 15 f,; 
relation of primitive, to ex- 
change, 34 f.; activities of, 
in universe, 458 f . 

Man-day: as unit of industrial 
life, 275 f . ; as unit of exist- 
ence, 277 f. 

Man-hours: 272, 275, 276 f., 
290 ff; application of, 302; in 
relation to want-units, 303- 
311; man-hours for, 338-345. 

Manufacturers : protective 
measures of, 450 ff. 

Manufactures : evolution of, 
37 f . ; effect of recreation 
upon, 162 f. 

Matter: forms of, classified, 
26 ff. 

JNlechanics, 22. 

Merchant: evolution of the, 37. 

Merger, defined, 451. 

Metals: relation of, to ex- 
change, 385 ff. ; as exchange 
medium, 435. 

Mills, 4, 137, 235. See also 
Industry. 

Mind: value of, 15-17; primi- 



tive, 36 f . ; sound, dependent 
upon sound body, 437-462. 
Mines, 125, 202. 
"Mixed trains," 25. 
Molecules, 268. 

Money: medium of exchange, 
41 ff.; transmutation of 
property into, 44 f . ; ratio of 
substance to, 84 f . ; ratio of 
land to, unit, 86 f . ; expres- 
sion of value in, 131 f.; result 
of sale of man-hours, 304 ff. ; 
command of, over utilities, 
368; discussion of, 377-401; 
uses of, in development of 
trade, 377 ff. ; relation be- 
tween, and exchange, 378 ff.; 
causes of desire for, 379; as 
a measure of value, 379 ff.; 
unit of coin, 379 f . ; ratio of, 
to utilities, 380 ff. ; necessity 
for, in conduct of business, 
286 f.; pay for use of, 386; 
lenders, 387; bank notes as, 
387 f. ; government notes as, 
388 ; checks as, 389 f . ; scar- 
city of, 394 f . ; prices of, 423 ; 
trend of, system, 424-435. 
See Unit of Exchange. 

Money-lenders, 387. 

Monopoly, 452. 

Mules, 226. 

Munitions, production of, 224. 

Music boxes, 163. 

Musicians, 214. 



N 



National welfare: relation of 
volume of production to, 436. 

New England, 9. 

New Orleans, 9. 

New York: 9, 420; measures 
of, dealers to curb over-pro- 
duction, 450. 

Notes: 42 f., 435. See also 



INDEX 



469 



Promissory Notes, Bank 
Notes, Government Notes. 



O 



Oils: 157; cosmic force in re- 
lation to production of, 157 f. 

•'On trust," defined, 45. 

Organizations: relation of pro- 
ducing, to profit, 132 ff., 
178 f.; 190; intricate func- 
tions of business, 211 f.; 
240; sources of capital of, 
264. 

Overproduction : meaning of, 
222; ignorance at root of, 
223 f. 



Packing-houses, 190. 

Paintings, as utilities, 129, 

Payment : significance of, 
359 ff. ; deferred, 359-364, 
405 ff.; adjustment of, 416 ff. 

Peace: adjustment of value of 
utilities in times of, 447 ff. 

Pearls, as utilities, 127. 

Pharaoh, 242. 

Physicians, 214. 

"Plant": defined, 124; impor- 
tance of efficiency to profit 
from, 133 ff. ; specialized, 
193. 

Plantations, 124. 

Population: increase of, re- 
sponsible for evolution of 
artisan, 64 ff . ; effect of, upon 
demand, 33 ff. ; 82 ; relation 
of, to flow of value, 52 ff. ; 
specialization dependent up- 
on increase in, 84-92; influ- 
ence of increased, upon prices 
and profit, 93-113; effect of 
credit loss upon, 440 f . 

Prices : defined, 38 ; relation of, 



to human effort, 51 ff.; fac- 
tors that determine, 52; ef- 
fect of supply and demand 
upon, 76; relation of wages 
to, 81 f.; development of, for 
sources of substance, 84-87 ; 
dependence of, of land upon 
substance, 86 f . ; development 
of, 93-113; effect upon, of 
machines, 114-135; depend- 
ence of profit upon, 131 ff.; 
dependent upon employee, 
135; relativity of, 155-174; 
determination of, by interre- 
lation, 170 ff.; interrelation 
of effort, and profit, 188-212; 
effect of World War upon, 
224 ff. ; rising and falling, 
311-314; profit and, 331 ff.; 
fluctuation of, 388 f . ; effect 
of Government ownership 
upon, 441 ff.; determination 
of, 452 ff. See also Value. 

Producer: evolution of, 64-83; 
in relation to profit, 100- 
113; adjustment of profit 
and loss by, 130. 

Production : development of, 
37 ff.; dependence of, upon 
profit, 62 f . ; divisions of 
functions of, 64-83 ; evolu- 
tion of, 65 ff. ; instruments 
of, 87-92, 118 ff.; phases of, 
129 ff.; flow of processes of, 
166 f.; assumption of respon- 
sibility for, 181 f.; elements 
that control duration of, 
196 f.; cessation of, 214; ef- 
fect of war upon, 223 f.; ef- 
fect of war upon instruments 
of, 230 f . ; ultimate units of, 
and consumption, 266-284 ; 
primary function of, 270; by 
individuals, 286-299; by or- 
ganizations, 299-302 ; syn- 
thesis of, 352-359; full sig- 



470 



INDEX 



nificance of, 394 f . ; relation 
of, to material welfare, 436; 
of utilities ultimate purpose 
of, 437; relation of Govern- 
ment to, 438 ; menace of un- 
restricted, 449; measures to 
prevent excessive, 450 f . ; 
460. See also Manufactures, 
Overproduction. 

Profit: defined, 60 f.; in rela- 
tion to wages, 74 ff . ; effect 
of, upon specialization, 81 f.; 
relation of instruments of 
production to, 91 f.; factors 
contributing to, 100-113; ef- 
fect of machines upon, 114- 
135; expression of, 129 f.; 
accrument of, 129 f.; rela- 
tive, defined, 131; relativity 
of, 175-187; interrelation of 
effort, prices, and, 188-212; 
causes of, equalization, 
192 1; limit of, 193 ff.; ef- 
fect of, restriction, 241 ; se- 
curing of, 318-324; living 
upon, 335-338 ; effect of busi- 
ness depression upon, 374 f . ; 
relation volume of, to na- 
tional welfare, 436 ; effect of 
Government ownership upon, 
441 f.; effect of war upon, 
444 ff. 

"Profit and loss" account, 259. 

Progress: result of triumph of 
mind, 16 ff.; dependence of, 
upon debits and credits, 231. 

Prohibition: tendency of, of 
utilities, 438. 

Promissory notes: 409; dis- 
counting of, in payment for 
utilities, 435. See Notes. 

Property: in matter and, in 
force, 18; essence of, ex- 
plained, 18 f.; evolution of 
the institution of, 35 ff.; 
transmutation of, into cred- 



its, 44 f . ; relation of, to unit 
of exchange, 45 ff. ; retention 
of, 92. 

Prosperity: World War in re- 
lation to national, 225. 

Purchase : designation of, 43 ff. 
See Transfer. 

Purchaser: evolution of the, 
37 f. 

Purchasing power. See Value. 



R 



Railroad: effect of, upon indus- 
trial and commercial devel- 
opment, 137 f.; rates, 190; 
235, 260. 

Ranches, 124, 125. 

Real estate: determination of, 
value, 124 ff.; fluctuation of, 
value, 127-129. See Land, 
Property, Structures. 

Recreation : effect of, vogues 
upon manufactures, 162 f. 

Refineries, 157. 

Rents: 215, 323; as source of 
income, 334 f. 

Repairs, 285. 

Retailers: relation of, to profit, 
130. 

Royal charters, 243. 

Rugs, 163. 



S 



Sagacity, 244. 

San Francisco, 10. 

Satisfaction of wants, 166. 
See Demand, Wants. 

Savings: 215; effect of, upon 
efficiency, 457. 

"Scarcity of money," explained, 
394 f. 

Self-preservation : dependence 
of, upon exchange, 34 ff. ; re- 
lation of, to economies, 34 ff. 



INDEX 



471 



Self-sufficiency: state of, de- 
fined, 35; reign of, 37; in 
American colonies, 53; 64; 
force-unit in the age of, 166, 

Servants: efforts of, 10. 

Shelter, 202. See Dwellings, 
Homes, Houses. 

\Silver: use of, in exchange, 
379. 

Soul: relation of human effort 
to, 17. 

Sources of substance, 84-87. 

Specialization, 81. 

Staples: profit on, 129. See 
Utilities. 

Steam: effect of, application 
on industrial development, 
137 ff. ; introduction of, 220. 

Steel, 261. 

Stocks: 185 ff.; value of, de- 
pendent upon rate of divi- 
dends, 240 f . ; variation in 
value of, 420. 

Stores, 235. 

Strife. See War. 

Structures, 124. 

Substance: as product of force, 
6 ff. ; part played by human 
effort in combining, 6 ff. ; ap- 
plication of force to, 10 f . ; 
replacement of, 12 f.; sources 
of, 84-87; value of source 
of, 334. 

Supply: early phases of, 35 ff.; 
effect of, upon demand, 76; 
operation of, 140-142; rela- 
tion of, to demand, 443. 

Surplus, 182. 



Taxation: effect of Government 
ownership upon, of utilities, 
439 ; effect of war upon, of 
utilities, 446. 



Taxes, as governmental credits, 
227 f. 

Texas, 9. 

Theaters, 190. 

Tools: 16; development of, 
87 f . ; supply and demand in 
relation to, 122 ff. See also 
Instruments of Production. 

Trade: evolution of interna- 
tional, 141 f. See also Ex- 
change, Commerce. 

Tradesman : evolution of, 37 f . 

Tramps, 202. 

Transfer: relation of coin to, 
42 f . ; explanation of factors 
of, 43 ff. ; essentials of, 44 f . ; 
281. See also Exchange, 
Purchase. 

Tribe: economic evolution of, 
35 f.; 37. 

Truck gardens, 124. 

Trusts, 451. 



U 



Ultimate units of production, 
266-284. 

"Unearned increment," defined, 
127. 

Unit of exchange: 34-51; de- 
signation of, 41 ; significance 
of, 47 f . ; shifting ratio of, 
48 ff.; 435. See Coin, Dollar. 

Unit of price, defined, 95. 

Unit of time, 271. 

Unit of utility, 156 ff. 

Unit of value: ratio of utili- 
ties to, 158 f. 

United States: 8; unit of ex- 
change in, 41; development 
of industry in, 136-141; ef- 
fect of immigration upon 
industrial life in, 137; edu- 
cational system in, 205; 
debit and credit system in, 
during World War, 224 f.; 



472 



INDEX 



effect of World War upon 
production in, 227; utiliza- 
tion of, Government credits 
during World War, 227; 
value of farms in, 247; 282; 
characteristics of desires in, 
420 f . ; regulation of price of 
utilities by, 440 f . ; effect of, 
ownership upon profit, 386. 

Utilities : 8 ff. ; and utility, 23- 
33 ; classification of, 28 ff. ; 
"final," defined, 30; "inter- 
mediate," defined, 31; disin- 
tegration of, 32; relation of 
price to, 38 ff. ; evolution of, 
as intermediary in exchange, 
41 ff.; ratio of, to unit of 
exchange, 47 f. ; machines as 
economic, 87; production of 
final, 130 f.; ratio of, pro- 
duction to human effort, 
152 f.; ratio of, to dollar,, 
158 f . ; relative importance 
of, 159 ff.; effect of World 
War upon, 225 ff . ; as capi- 
tal, 261 f.; discount of notes 
in relation to, 435; purpose 
of production of, 337 ff. ; 
regulation of production of, 
437 ff. ; adjustment of values 
of, during peace, 447 ff. ; 
menace of unrestricted pro- 
duction of, 449 f . ; measures 
to prevent overproduction of, 
451 ; accumulation of, in re- 
lation to life values, 461 f. 

Utility : defined, 27 f. ; econo- 
mic, 28. 

Utilization, defined, 241. 



Value : designation of, 1 1 ff . ; 
of force, 13 ff., 22; of mind, 
15-17; law of, 18 ff.; rela- 
tion of, to utilities, 34-51; 



development of, 35 ff . ; rela- 
tion of price to, 38 ff. ; effect 
of progress upon, 40 ff., 
64 ff.; standard of, 401, 41; 
ratio of, 64 ff. ; relation be- 
tween, and efficiency, 93 ff . ; 
influence of employer upon, 
96 ff., 114 ff.; effect of pro- 
duction upon, 96-113; effect 
of machines upon, 114-135; 
effect of supply and demand 
upon, 122 ff.; flow of, from 
land, 124 f . ; deterioration of 
land, 125; increase in land, 
127 f. ; fluctuation, 159 ff. ; 
effect of, fluctuation upon 
credit, 169 f.; commercial 
significance of, 232-249; de- 
fined, 234; general signifi- 
cance of, discussed, 234-251; 
the attribute of utilities, 
236 ff.; accumulation of, 244; 
relation of, to human exist- 
ence, 249-251; adjustment 
of, dependent upon bookkeep- 
ing, 263-265; expression of, 
in force-utility-units, 274 ff. ; 
of utility utilized in produc- 
tion, 329-334; money as a 
measure of, 378 ff. See also 
Price. 

W 

Wage: degrees of, 276. 

Wage-earners : evolution of, 
64-83; 114 ff.; 203; as em- 
ployers, 210; effect of World 
War upon, 226. See also 
Artisan, Labor, Employee. 

Wages: origin of, system, 
64 ff . ; influence of profit 
upon, 74 ff., 95 ff. ; develop- 
ment of, system, 77 ff. ; ef- 
fect upon, of specialization, 
81 f., 103 ff.; efficiency and. 



INDEX 



473 



107 ff.; machinery in relation 
to, 114 ff.; investment of, 
307 f . ; effect of Government 
ownership upon, 442 f . ; rela- 
tion of supply and demand 
to, 443 f . ; relation of, to 
volume of production, 447 ff. 

"Want," significance of, 35. 

Want-units: exemplified, 166; 
relation of, to man-hour, 
303-311. 

Want-utility-units : explained, 
272 ff.. ; relation of, to force- 
utility units, 273 ff. 

Wants : dependence of, upon 
human effort, 4 ff . ; relation 
of, to prices, 51 ff.; ratio of 
human effort to, 152 f. See 
Human Effort. 

War: 15; causes of primitive, 



35; relation of, to prosperity , 
443 ff. 

Warehouses: purpose of, 91; as 
instruments of production, 
129. 

Wares : mediaeval, 37 f . See 
Utilities. 

Water-power, 235. 

Wheat: stages of transforma- 
tion of, into flour, 8 f . 

Wholesale stores, 91. 

Wisconsin, 9. 

Wool, 225. 

World War: 220; effect of, 
upon prices and production, 
224 ff.; Unitda States and 
the, 226 ff . ; utilization of 
government credits in the, 
227. 



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